10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2008

OR

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to              .

Commission File Number: 000-26926

ScanSource, Inc.

(Exact name of registrant as specified in its charter)

South Carolina	57-0965380
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6 Logue Court Greenville, South Carolina	29615
(Address of principal executive offices)	(Zip Code)

(864) 288-2432

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, no par value	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    ¨  Yes    x  No

The aggregate market value of the voting common stock of the Registrant held by non-affiliates of the Registrant at December 31, 2007 was $829,661,000, as computed by reference to the closing price of such stock on such date.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 22, 2008
Common Stock, no par value per share	26,349,520 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2008 are incorporated by reference into Part II of this Form 10-K, and portions of the Registrant’s Proxy Statement to be furnished in connection with its 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business	1
	Item 1A.	Risk Factors	6
	Item 1B.	Unresolved Staff Comments	10
	Item 2.	Properties	10
	Item 3.	Legal Proceedings	10
	Item 4.	Submission of Matters to a Vote of Security Holders	11
PART II
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	11
	Item 6.	Selected Financial Data	11
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	11
	Item 8.	Financial Statements and Supplementary Data	11
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	12
	Item 9A.	Controls and Procedures	12
	Item 9B.	Other Information	12
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	13
	Item 11.	Executive Compensation	13
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	13
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	13
	Item 14.	Principal Accounting Fees and Services	13
PART IV
	Item 15.	Exhibits, Financial Statement Schedules	13
Signatures

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the “Business,” “Risk Factors,” and “Legal Proceedings” sections and elsewhere herein and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” sections and elsewhere in our Annual Report to Shareholders for the fiscal year ended June 30, 2008 (which is incorporated by reference herein), which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “hopes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements contained in “Risk Factors.” The forward-looking information we have provided in this Form 10-K and in our Annual Report to Shareholders pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.

PART I

ITEM 1. Business.

ScanSource, Inc. (the “Company”), incorporated in 1992, is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony, and communications products through its ScanSource Communications unit; and electronic security products and wireless infrastructure products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource Latin American and European sales units. On April 4, 2008, the Company announced that it had expanded its communications business internationally through the acquisition of MTV Telecom (Distribution) PLC, a UK-based distributor of voice and data solutions. See Note 13 to the Notes to Consolidated Financial Statements of the Company included in the Annual Report to Shareholders for the fiscal year ended June 30, 2008 for financial information concerning the Company’s reporting segments and the geographic areas in which the Company operates.

North American Distribution Segment

ScanSource POS and Barcoding Sales Unit

The ScanSource POS and Barcoding sales unit markets AIDC and POS products which interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling and warehouse management. The bar code family of products is referred to as automatic identification and data capture (AIDC) because it includes all types of portable data collection terminals, wireless products and bar code label printers, in addition to scanners. POS products are those PC-based products that have replaced electronic cash registers in retail and hospitality environments and the peripheral products that attach to them. These peripheral devices include such items as cash drawers, pole displays, signature capture units, display monitors and magnetic strip readers. In addition to these peripheral devices, ScanSource POS and Barcoding also sells products that attach to the POS network in the store, including kiosks, network access points, routers and digital signage displays.

ScanSource POS and Barcoding sales unit vendors include most of the leading AIDC and POS manufacturers, including APG, Cherry Electrical, Cisco, Cognitive Solutions, Datalogic, Datamax, Elo, Epson America, Honeywell, IBM, Intermec, Ithaca Peripherals, Magtek, Microsoft, MMF Cash Drawer, Motorola, NCR, Pioneer, Posiflex, Sato, and Zebra Technologies.

Catalyst Telecom Sales Unit

The Catalyst Telecom sales unit markets voice, data and converged communication systems and is a distributor of Avaya communications solutions, including Avaya Global Communication Solutions (GCS), Small Market Business Solutions (SMBS) and internet protocol (IP) products. Catalyst Telecom also markets products complementary to the Avaya product line from vendors including Extreme Networks, Juniper Networks, Plantronics, Polycom, and multiple wireless vendors.

ScanSource Communications Sales Unit

The ScanSource Communications sales unit was created in 2008 with the merger of two of the Company’s former sales units, Paracon and T2 Supply. ScanSource Communications is a comprehensive value-added distributor of total communications solutions, including video and audio conferencing products; telephony solutions including Voice over IP (VoIP); and computer telephony building blocks. ScanSource Communications’ manufacturing partners include Polycom, Dialogic, Plantronics, Audiocodes, Cisco, Adtran, Quintum, and Envox.

1

ScanSource Security Distribution Sales Unit

The ScanSource Security Distribution sales unit focuses on hardware distribution of electronic security equipment using the two-tier distribution model, as described below in “Industry Overview”. The product offering includes identification, access control, video surveillance, intrusion-related, and wireless infrastructure products. Manufacturers include Alvarion, Axis, Datacard, Digiop, DSC, Fargo, Firetide, HID, GE Security, Motorola Wireless, Panasonic, Sony, Tropos and Zebra Card.

International Distribution Segment

The Company’s international distribution segment markets AIDC, POS, and communications products exclusively to technology resellers and integrators in the Latin American (including Mexico) and European markets. Key vendors include many of the same vendors that supply the ScanSource POS and Barcoding and ScanSource Communications sales units of the North American distribution segment. As discussed previously, the Company acquired MTV Telecom, a UK-based distributor of voice and data solutions. Key vendors for this new sales unit include Avaya, Siemens, Panasonic, and Swyx.

See Item 1A. “Risks Factors” below for a discussion of certain risks relating to the Company’s international operations.

Products and Markets

The Company currently markets over 55,000 products from approximately 160 hardware and software vendors to over 20,000 reseller customers primarily from its central warehouses in Mississippi, Florida, Mexico and Belgium.

AIDC technology incorporates the capabilities for electronic identification and data processing without the need for manual input and consists of a wide range of products, including bar code printers, hand-held and fixed-mount laser scanners, mobile and wireless data collection devices, and magnetic stripe readers. As AIDC technology has become more pervasive, applications have evolved from traditional uses such as inventory control, materials handling, distribution, shipping and warehouse management to more advanced applications such as healthcare. POS products include those computer-based systems that have replaced electronic cash registers in grocery, retail, and hospitality environments. POS product lines include computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units. Voice and data products include private branch exchanges (PBXs), key systems, and telephone handsets and components used in voice, fax, data, voice recognition, call center management and IP communication applications. Converged communication products combine voice, data, fax, and speech technologies to deliver communications solutions that combine computers, telecommunications and the Internet. Converged communications products include telephone and IP network interfaces, VoIP systems, PBX integration products and carrier-class board systems-level products. Video products include video and voice conferencing and network systems. Electronic security products include identification, access control, video surveillance, and intrusion-related products, and wireless infrastructure products.

See “Management’s Discussion and Analysis” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008 for a discussion of the amount of the Company’s net sales contributed by product categories.

Industry Overview

The distribution channels for specialty technology products generally consist of manufacturers, wholesale distributors such as ScanSource, resellers and end-users. The typical “sales channel” for specialty technology products typically evolves through a three-stage process: (i) direct sales by manufacturers to end-users; (ii) single-tier distribution in which manufacturers sell to resellers who, in turn, sell directly to end-users; and (iii) two-tier, or wholesale distribution, in which manufacturers sell to wholesale distributors, including ScanSource, who sell only to resellers who, in turn, sell directly to end-users.

2

Currently, the technology products wholesale distribution channel is served by both broadline and specialty distributors. The broadline distributors are engaged primarily in conventional order fulfillment and typically offer their reseller customers less support and fewer value-added services than do specialty distributors. The specialty distributors that compete with ScanSource are generally smaller, both in terms of size and geographic area covered.

Competition among an expanding number of manufacturers typically causes product prices to decrease and product applications to expand, which has resulted in an increasing number of resellers entering the market in order to support a broader base of potential end-users. As the number of resellers and end-users has grown, competition among manufacturers and within the reseller channel has intensified. Because many specialty technology manufacturers develop products that represent only one part of a total solution, most products eventually are developed to provide interoperability among products from multiple manufacturers. As a result of interoperability, a variety of manufacturers’ products are typically configured together to create a system solution. Therefore, both manufacturers and resellers have become more dependent upon value-added wholesale distributors such as ScanSource for the aggregation of products and reseller support services, as well as the organization and maintenance of an efficient market structure.

In addition, manufacturers that face declining product prices and rising costs of direct sales increasingly rely upon value-added wholesale distributors by outsourcing certain support functions, such as product assortment, delivery, inventory management, technical assistance, and marketing. At the same time, shortened product life cycles and the introduction of new products and applications have caused resellers increasingly to rely on wholesale distributors for various inventory management, financing, technical support and related functions. The Company believes that as the reseller market grows and becomes more fragmented, and as specialty technology products continue to transition to open systems, the wholesale distribution channel in which the Company operates will become increasingly more important.

Vendors

The Company’s merchandising department recruits vendors and manages important aspects of its vendor relationships, such as purchasing arrangements, cooperative marketing initiatives, vendor sales force relationships, product training and the monitoring of rebate programs and various contract terms and conditions. The Company generally enters into non-exclusive distribution agreements with vendors. These agreements typically provide the Company with stock rotation and price protection provisions that may mitigate the risk of loss from slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these distribution agreements contain minimum purchase requirements that the Company must meet in order to receive preferential prices. The distribution agreements are generally terminable on 30 to 120 days notice by either party.

Customers

The Company’s reseller customers currently include over 20,000 active value-added reseller accounts (“VARs”) located in the United States, Canada, Mexico, Latin America and Europe. No single customer accounted for more than 6% of the Company’s total net sales for fiscal 2008. The Company generally targets two types of reseller customers:

Specialty Technology VARs.

These resellers focus on selling specialty technology products as tailored software or integrated hardware solutions for their end-users’ existing applications or incorporating specialty technology products into customized technology solutions for their end-users. Primary industries served by these resellers include manufacturing, distribution, health care, pharmaceutical, hospitality, government, convenience, grocery, financial, and other retail markets.

3

Networking or PC VARs.

These resellers develop computer solutions and networking for their end-users’ microcomputer needs. They typically have well-established relationships with end-user management information system directors and are seeking additional revenue and profit opportunities in related technology markets, such as AIDC, POS, security, or communications.

Sales and Electronic Commerce

The Company’s 299-member sales department consists primarily of inside sales representatives located in the United States, Canada, Mexico, Belgium, France, Germany, the United Kingdom, and the Netherlands. In order to build strong customer relationships, most active resellers are assigned to a sales representative. Each sales representative negotiates pricing directly with their assigned customers. The Company also employs business development representatives who are responsible for developing technical expertise within broad product markets, recruiting customers, creating demand, and reviewing overall product and service requirements of resellers. Each sales representative and business development representative receives comprehensive training with respect to the technical characteristics of each vendor’s products. This training is supplemented by frequent product seminars conducted by vendors’ representatives and bi-weekly meetings among product, marketing and sales managers.

Increasingly, customers rely upon the Company’s electronic ordering and information systems, in addition to its product catalogs and frequent mailings, as sources for product information, including availability and price. Through the Company’s website, most customers can gain remote access to the Company’s information systems to check real-time product availability, see their customized pricing and place orders. Customers can also follow the status of their orders and obtain UPS and FedEx package tracking numbers from this site.

Marketing

The Company provides a range of marketing services, including cooperative advertising with vendors through trade publications and direct mail, product catalogs for each of the North American, European and Latin American markets, periodic newsletters, management of sales leads, trade shows with hardware and software companies and vendors, direct mail and sales promotions. In addition, the Company organizes and operates its own seminars teaming with top vendors to recruit prospective resellers and introduce new applications for the specialty technology products it distributes. The Company frequently customizes its marketing services for vendors and resellers.

Value-Added Services

In addition to the basic order fulfillment and credit services that conventional wholesale distributors typically provide to resellers, the Company differentiates itself by providing an array of value-added services and business tools that assist resellers to provide more complete solutions and improve customer service. Such services include system integration, professional services, and technical support.

Operations

Information System

The Company’s information system is a scalable, centralized processing system capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Sales representatives rely on the information system for on-line, real-time information on product pricing, inventory availability and reservation, and order status. The Company’s warehouse operations use bar code technology for receiving and shipping, and automated UPS and FedEx systems for freight processing and shipment tracking, each of which is integrated with the Company’s information system. The customer service and technical support departments employ the system for documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company’s buyers depend on the system’s purchasing and receiving functions to track inventory on a continual basis.

4

Central Warehouse and Shipping

In February, 2008, the Company announced the relocation of its distribution center from its former location in Memphis, Tennessee to its new location in Southaven, Mississippi. This new 600,000 square foot distribution center is located near the FedEx hub facility in Memphis, Tennessee and serves all of North America. The Company utilizes a third party warehouse located in Liege, Belgium that serves all of Europe, including the United Kingdom. The Company has additional warehouse facilities in Florida and Mexico, which serve Latin America (including Mexico). The Company believes that its centralized distribution creates several advantages, including: (i) a reduced amount of “safety stock” inventory which, in turn, reduces the Company’s working capital borrowings; (ii) an increased turnover rate through tighter controls over inventory; (iii) maintenance of a consistent order-fill rate; (iv) improved personnel productivity; (v) improved delivery time; (vi) simplified purchasing and tracking; (vii) decreased demand for management personnel; and (viii) flexibility to meet customer needs for systems integration. The Company’s objective is to ship all orders on the same day, using bar code technology to expedite shipments and minimize shipping errors. The Company offers reduced freight rates and flexible delivery options to minimize a reseller’s need for inventory.

Financial Services

The Company routinely offers competitive credit terms relative to the specific geographic area for qualified resellers and facilitates various third party financing options, including leasing, flooring, and other secured financing. The Company believes this policy reduces the customer’s need to establish multiple credit relationships with a large number of manufacturers.

Competition

The markets in which the Company operates, as identified above, are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The Company’s competitors include regional and national wholesale distributors, as well as hardware manufacturers (including most of the Company’s vendors) that sell directly to resellers and to end-users. In addition, the Company competes with master resellers that sell to franchisees, third-party dealers and end-users. Certain of the Company’s current and potential competitors have greater financial, technical, marketing and other resources than the Company has and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Certain smaller regional competitors, who are specialty two-tier or mixed model master resellers, may also be able to respond more quickly to new or emerging technologies and changes in customer requirements. Competition has increased for our sales units over the last several years as broadline and other value-added distributors have entered into the specialty technology markets. Such competition could also result in price reductions, reduced margins and loss of market share by the Company.

Employees

As of June 30, 2008, the Company had 1,059 employees located in North America, Latin America (including Mexico) and Europe, none of whom was a member of an industry trade union or collective bargaining unit. The Company considers its employee relations to be good.

Service Marks

The Company conducts its business under the trademarks and service marks “ScanSource POS and Barcode”, “Catalyst Telecom”, “ScanSource Communications”, “Partner Services”, and “ScanSource Security Distribution”.

5

The Company has been issued registrations for the service marks “ScanSource” and “Catalyst Telecom” in countries in its principal markets. These trademarks and service marks do not have value assigned to them and have a designated indefinite life. The Company does not believe that its operations are dependent upon any of its trademarks or service marks. The Company also sells products and provides services under various trademarks, service marks and trade names to which reference is made in this report that are the property of owners other than the Company.

Additional Information

The Company’s principal internet address is www.scansourceinc.com. The Company provides its annual and quarterly reports free of charge on www.scansourceinc.com, as soon as reasonably practicable after they are electronically filed, or furnished to, the Securities and Exchange Commission (“SEC”). We provide a link to all SEC filings where current reports on Form 8-K and any amendments to previously filed reports may be accessed, free of charge, on our website.

ITEM 1A. Risk Factors.

An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our securities. There also are other risks that we may not describe, generally because we currently do not perceive them to be material, that could impact us. If any of these risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment. We expressly disclaim any obligation to update or revise any risk factors, whether as a result of new information, future events or otherwise, except as required by law.

People – If we cannot continue to hire and retain high quality employees, our business and financial results may be negatively affected.

Our operating results could be adversely affected by increased competition for employees, higher employee turnover, or increased salary and benefit costs. Like most businesses, our employees are important to our success and we are dependent in part on our ability to retain the services of our key management, sales, IT, operational, finance and administrative personnel. We have built our business on a set of core values and we attempt to hire employees who are committed to these values. We want employees who will fit our culture of providing exceptional service to our vendors and customers. In order to compete and to continue to grow, we must attract, retain, and motivate employees, including those in executive, senior management, sales, marketing, logistics, technical support and other operating positions.

Many of our employees work in small teams to provide specific services to vendors and customers. They are trained to develop their knowledge of vendor products, programs and practices, and customer business needs, as well as to enhance the skills required to provide exceptional service and to manage our business. As they gain experience and develop their knowledge and skills, our employees become highly desired by other businesses. Therefore, to retain our employees, we have to provide a satisfying work environment and competitive compensation and benefits. If our costs to retain our skilled employees increase, then our business and financial results may be negatively affected.

Our continued growth is also dependent, in part, on the skills, experience and efforts of our senior management, including but not limited to, Michael Baur, our Chief Executive Officer. While we have recently entered into a new employment agreement with Mr. Baur and we have obtained a key person life insurance policy on his life, the loss of the services of Mr. Baur or any member of our senior management team could also have an adverse effect on our business, financial condition and results of operations. We may not be successful in retaining the members of our senior management team or our other key employees.

Vendor relationships – Our success is highly dependent on our relationships with vendors and on product supply and availability. There can be no assurance that our relationships will continue as currently in effect.

Our success is highly dependent on our relationships and agreements with major vendors and our ability to support the products and programs they offer. Sales of products from our ten largest vendors accounted for approximately 85% of our net sales for fiscal 2008. Although we believe our relationships with our major vendors are good, there can be no assurance that these relationships will continue as currently in effect. The loss or deterioration of our relationship with a major vendor, the authorization by a major vendor of additional wholesale distributors, a change in a major vendor’s strategy (such as increasing direct sales), the consolidation of major vendors, the deterioration of a major vendor’s financial condition, the inability of a major vendor to continue the support of its products, or the failure by us to sustain good relationships with a major vendor and to add new vendors could have a material adverse effect on our business, financial condition, and results of operations.

        From time to time, we experience short-term shortages in availability of some products from vendors. Our ability to obtain particular products in the required quantities and to fulfill customer orders on a timely basis is critical to our success. Vendors who currently distribute their products through us may decide to shift to or substantially increase their existing distribution, through or to other distributors, their own dealer networks, or directly to resellers or end-users. Our vendors have, from time to time, made efforts to reduce the number of distributors with which they do business. These efforts could result in more competition and pricing pressures as distributors seek to secure distribution rights, which could have an adverse affect on our operating results. If vendors are not able to provide us with an adequate supply of products to fulfill our customers’ orders on a timely basis or if we cannot otherwise obtain particular products, our reputation, sales and profitability may suffer.

The relationships with most of our major vendors are governed by vendor agreements. These agreements generally contain provisions for periodic renewals and for termination by the vendors without cause and typically upon short notice. They also frequently provide the payment terms, which generally provide us with favorable liquidity. Some of our vendor agreements require minimum purchase amounts or the maintenance of a representative assortment of the vendors’ full line of products. Our vendors generally have the ability to make significant and adverse changes in their sales terms and conditions. Such changes may include reducing the amount of price protection and return rights as well as reducing the level of purchase discounts and rebates they make available to us. In some cases we have no guaranteed price or delivery agreements with our vendors. Our inability to pass through to our reseller customers the financial impact of these changes could cause us to record inventory write-downs or other losses and could have an adverse affect on our gross margins.

As is typical in our industry, we receive volume discounts and certain credits for market development from most of our vendors. These purchase discounts and rebates affect our gross margins. The termination of one of these agreements with a major vendor, or its failure to continue to offer terms that are as favorable to us as current terms, could have an adverse effect on our business, financial condition, and results of operations.

Customer relationships – We operate in a highly competitive environment and good customer relations are critical to our success. There can be no assurance that we will be able to retain and expand our customer relationships or acquire new customers.

Meeting our customers’ needs quickly and fairly is critical to our business success. Our transactions with our customers are generally performed on a purchase order basis rather than under long term supply agreements. Our customers generally do not have an obligation to purchase from us. Therefore, our customers can readily switch vendors. From time to time, we experience shortages in availability of some products from vendors, and this impacts our customers’ decisions regarding whether to make purchases from us. Anything that negatively impacts our customer relations also can negatively impact our operating results. Accordingly, our sales can vary as a result of fluctuations in pricing, product availability, and general competitive and economic conditions.

6

Centralized functions – We have centralized a number of functions to provide efficient support to our business. As a result, a loss or reduction of use of one of our locations could have an adverse effect on our business operations and financial results.

In order to be as efficient as possible, we centralize a number of critical functions. For instance, we currently distribute products in North America from a single warehouse near Memphis, Tennessee (with corresponding arrangements for our Latin American and European markets). Similarly, we utilize a single information system based in Greenville, South Carolina. While we have backup systems and business continuity plans, any significant or lengthy interruption of our ability to provide these centralized functions could significantly impair our ability to continue normal business operations. In addition, the centralization of these functions increases our exposure to local risks, such as the availability of qualified employees and the lessening of competition for critical services, such as freight and communications.

Although we have business interruption insurance, not all losses are covered, and an uninsured loss from electrical or telephone failure, fire or other casualty, or other disruption could have an adverse effect on our business, financial condition, and results of operations. In addition, there are limits on all of our insurance coverage, and it is possible that losses might exceed that coverage.

Systems – Our ability to manage our business and monitor results is highly dependent upon information and communication systems. A failure of these systems could disrupt our business.

We are highly dependent upon a variety of internal computer and telecommunication systems to operate our business. In addition, our customers rely increasingly on our electronic ordering and information systems as a source for product information, including availability and pricing. There can be no assurance that our systems will not fail or experience disruptions, and any significant failure or disruption of these systems could prevent us from making sales, ordering and delivering products and otherwise conducting our business.

In order to continue support of our growth, we plan to make technological upgrades to our information systems. This can be a lengthy and expensive process that may result in a significant diversion of resources from other operations. In addition, the information systems of companies we acquire may not be sufficient to meet our standards or we may not be able to successfully convert them to provide acceptable information on a timely and cost-effective basis. In addition, we must attract and retain qualified people to operate our systems, expand and improve them, integrate new programs effectively with our existing programs, and convert to new systems efficiently when required. Any disruption to our business due to such issues, or an increase in our costs to cover these issues that is greater than what we have anticipated, could have an adverse affect on our financial results and operations.

Many of our customers use our website to check real-time product availability, see their customized pricing and to place orders. The Internet and individual websites have experienced a number of disruptions and slowdowns. In addition, some websites have experienced security breakdowns. While our website has not experienced any material disruptions or security breakdowns, any disruptions or breaches in security or a breach that compromises sensitive information could harm our relationship with our vendors, customers and other business partners. Any material disruption of our website or the Internet in general could impair our order processing or prevent our vendors and customers from accessing information and could adversely affect our operations.

7

International operations – Our international operations expose us to risks that are different from, or possibly greater than, the risks we are exposed to domestically.

We currently have facilities in seven foreign countries and sell products in a number of others. These operations are subject to a variety of risks that either are in addition to the risks that we face domestically or are similar risks but with potentially greater exposure. These risks include:

• Changes in international trade laws, such as the North American Free Trade Agreement, affecting our import and export activities, including export license requirements, restrictions on the export of certain technology, and tariff changes;

• Difficulties in collecting accounts receivable and longer collection periods;

• Changes in, or expiration of, various foreign incentives that provide economic benefits to us;

• Changes in labor laws and regulations affecting our ability to hire and retain employees;

• Fluctuations of foreign currency, exchange controls and currency devaluations;

• Potential political instability and changes in governments;

• Terrorist or military actions that result in destruction or seizure of our assets or suspension or disruption of our operations or those of our customers;

• Potential regulatory changes, including foreign environmental restrictions; and

• Different general economic conditions.

Our sales growth and gross profit for our international operations were adversely affected by pricing issues in our European operations caused by the strengthening of the Euro against the U.S. Dollar. This made us significantly less competitive in Europe as the U.S. Dollar continued to weaken against the Euro at a record rate. Our competitors, some of whom purchase inventory in U.S. Dollars, were able to lower their prices during this period without impacting their profitability.

        Because we have operations in Canada, Mexico and Europe, we are exposed to fluctuations in foreign currency exchange rates. Exchange rate fluctuations may cause our international results to fluctuate significantly when reflected in U.S. Dollar terms. We manage our exposure to fluctuations in the value of currencies using various derivative instruments. However, we may not be able to mitigate all foreign currency related risk. In addition, in foreign markets we are more dependent upon third party providers of key services, such as third party freight forwarders and third party warehouses. Adverse changes in any of these third party services could have an adverse effect on our business, financial condition, and results of operations. As we expand our international operations, we expect these risks to increase.

Credit exposure – We have credit exposure to our reseller customers. Any adverse trends in their businesses could cause us to suffer credit losses.

We have credit exposure to our reseller customers and negative trends in their businesses could increase our credit risk. As is customary in our industry, we extend credit to our reseller customers and most of our sales are on open accounts. We may be unable to collect on receivables if our reseller customers experience decreases in demand for their products and services, do not manage their businesses adequately, or otherwise become less able to pay due to adverse economic conditions. As we grow and compete for business, our typical payment terms tend to be longer, and therefore may increase our credit risk. While we evaluate resellers’ qualifications for credit and monitor our extensions of credit, these efforts cannot prevent all credit losses, and credit losses in excess of historical levels would negatively impact our performance. In addition, for financial reporting purposes we estimate future credit losses and establish an appropriate reserve. To the extent that our credit losses exceed those reserves, our financial performance will be negatively impacted.

Narrow profit margins – Our narrow margins significantly impact our operating results.

Because we are a distributor in a highly competitive industry, we have significant price competition that results in narrow gross profit and operating profit margins. Because these margins are narrow, fluctuations in sales can have a significant impact on our overall operating results.

Competition – We experience intense competition in all of our markets. Such competition could result in reduced margins and loss of our market share.

        The markets that we operate in are highly competitive. We compete on the basis of price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor solutions to the needs of our customers, quality and breadth of product line and services, and availability of technical and product information. Our competitors include regional and national wholesale distributors as well as hardware manufacturers (including most of our vendors) that sell directly to resellers and to end users. In addition, we compete with master resellers that sell to franchisees, third party dealers and end-users. Certain of our current and potential competitors have greater financial, technical, marketing and other resources than we have and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Certain smaller, regional competitors, who are specialty two-tier or mixed model master resellers, may also be able to respond more quickly to new or emerging technologies and changes in customer requirements. Competition has increased for our sales units as broadline and other value-added distributors have entered into the specialty technology markets. Such competition could result in price reductions, reduced margins and loss of our market share. As a result of intense price competition in our industry, our gross margins and our operating profit margins have historically been narrow and we expect them to be narrow in the future.

8

To remain competitive we may be forced to offer more credit or extended payment terms to our customers. This could result in an increase in our need for capital, increase our financing costs, increase our bad debt expenses and have a negative impact on our financial results.

Economic conditions – A further slowdown in economic activity could negatively impact our sales and operating results.

Our sales levels reflect not only the implementation and success of our growth strategies, but also general economic conditions and industry trends. To the extent that general economic conditions are poor, particularly if they are poor in the industry segments that we serve the most, our sales will be negatively impacted. If the current economic conditions continue or worsen, we may experience increased competitive pricing pressures, increased operating costs, operating losses, elevated levels of obsolete inventory, inventory write-downs and bad debt losses, as well as reduced availability of financing for us and our customers. Delays or reduction in IT spending could have an adverse effect on demand for our products and services, and consequently our results of operations, prospects and stock price. We may not be able to adequately adjust our cost structure in a timely fashion to remain competitive.

Growth strategies – If we fail to effectively manage and implement our growth strategies, we may experience a negative effect on our business and financial results.

A significant component of our growth strategy has been to add new vendors and products, and we expect to be able to enter new product markets in the future. Expansion of our existing product markets and entry into new product markets divert the use of our resources and systems, require additional resources that might not be available (or available on acceptable terms), result in new or more intense competition, may require longer implementation times or greater start-up expenditures than anticipated, and may otherwise fail to achieve the desired results in a timely fashion, if at all. In addition, while we have been very successful in adding new vendors in the past, we already represent most of the significant vendors in our primary areas of focus, and there is regular consolidation among our vendors. As a result, there may be fewer expansion opportunities of this nature in the future. If we are unable to increase our sales and earnings by expanding our product offerings in a cost effective manner, then the valuation of our stock may decrease.

Our ability to successfully manage our growth will require continued enhancement of our operational, managerial, and financial resources and controls. Our failure to effectively manage our growth could have an adverse effect on our business, financial condition, and results of operations. Additionally, our growth may increase our working capital requirements and as a result, we may require additional equity or debt financing. Such financing may not be available on terms that are favorable to us, if at all.

Inventory – The value of our inventory may be adversely affected by market and other factors.

Our business, like that of other distributors, is subject to the risk that the value of our inventory will be adversely affected by price reductions by manufacturers or by technological changes affecting the usefulness or desirability of our products. Under the terms of most of our vendor agreements and the policy of most manufacturers of specialty technology products, we have some price protection and stock rotation opportunities with respect to slow moving or obsolete inventory items. However, these protections are limited in scope and do not protect against all declines in inventory value, excess inventory, or product obsolescence, and in some instances we may not be able to fulfill all necessary conditions or successfully manage such price protection or stock rotation opportunities. In addition, these industry practices are sometimes not reflected in vendor agreements and their application in a particular situation is dependent upon negotiations between our vendors and us. As a result, from time-to-time we are required to write down the value of excess and obsolete inventory, and should any of these write-downs occur at a significant level, they could have an adverse effect on our business, financial condition, and results of operations.

During an economic downturn, it is possible that prices may decline due to an oversupply of product, and therefore, there may be a greater risk of declines in inventory value. In addition, our vendors may become insolvent and unable to fulfill their protect obligations to us. Significant declines in inventory value in excess of established inventory reserves or dramatic changes in prevailing technologies could have an adverse effect on our business, financial condition, and results of operations.

Laws and regulations – Changes in tax laws, accounting rules, and other laws and regulations may adversely impact us.

We are subject to a wide range of local, state and federal laws and regulations. While we plan our operations based upon existing and anticipated laws and regulations, we cannot anticipate every change and can have only little, if any, impact on others. We are particularly susceptible to changes in income and other tax laws, laws regulating international trade, and accounting and securities disclosure laws and regulations. For instance, a change in current accounting standards could have a significant adverse effect on our reported earnings. To a lesser degree, changes in environmental regulation, including electronic waste recovery legislation, may impact us. In each case, a change in the laws or regulations that we are required to comply with could have an adverse impact on our business operations or financial results.

Quarterly fluctuations – Our net sales and operating results are dependent on a number of factors. Our net sales may fluctuate from quarter to quarter and these fluctuations may cause volatility in our stock price.

Our net sales and operating results may fluctuate quarterly as a result of changes in demand for our products and services, the introduction of new technology, actions by our competitors, changes in vendors’ prices or price protection policies, changes in vendors’ business practices or strategies, changes in freight rates, the timing of the addition of operating expenses to support our growth, the timing of major marketing or other service projects, product supply shortages, and the general economic factors referenced above. In addition, a substantial portion of our net sales in each quarter results from orders booked in that quarter, which are difficult to accurately forecast in advance. As a result, our performance in one period may vary significantly from our performance in the preceding quarter, and may differ significantly from our forecast of performance from quarter to quarter. The impact of these variances may cause volatility in our stock price.

Third-party freight carriers – We are dependent on third-parties for the delivery of a majority of our products. Changes in shipping terms or the failure or inability of our third-party shippers to perform could have an adverse impact on our business and results of operations.

We are dependent upon major shipping companies, including Federal Express and United Parcel Service, for the shipment of our products to and from our centralized warehouses. Changes in shipping terms, or the inability of these third-party shippers to perform effectively (whether as a result of mechanical failure, casualty loss, labor stoppage, or any other reason), could have an adverse effect on our business, financial condition, and results of operations. Recently, we have experienced significant increases in shipping costs due to increases in fuel costs. If our shipping costs increase or remain high, it may adversely affect our financial results if we are unable to pass on these higher costs to our customers.

Litigation – We routinely are involved in litigation that can be costly and lead to adverse results.

In the ordinary course of our business, we are involved in a wide range of disputes, some of which result in litigation. In addition, as a public company with a large shareholder base, we are susceptible to class-action and other litigation resulting from disclosures that we make and our other activities. Litigation is expensive to bring and defend, and the outcome of litigation can be adverse and significant. Not all adverse outcomes can be anticipated, and applicable accounting rules do not always require or permit the establishment of a reserve until a final result has occurred or probable and estimable. In some instances we are insured for the potential losses; in other instances we are not. An uninsured adverse outcome in significant litigation could have an adverse effect on our business, financial condition and results of operations.

See Item 3. “Legal Proceedings” below for information concerning certain litigation to which we are currently a party.

Capital Resources – Market factors may increase the cost and availability of capital. Additional capital may not be available to us on acceptable terms to fund our working capital needs and growth.

Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. We have an increased demand for capital when our business is expanding, including through acquisitions. Changes in payment terms with either suppliers or customers could increase our capital requirements. We have historically relied upon cash generated from operations, borrowings under our revolving credit facility, secured and unsecured borrowings, and, to a lesser extent, borrowings under a subsidiary’s line of credit to satisfy our capital needs and to finance growth. While we believe that our existing sources of liquidity will provide sufficient resources to meet our current working capital and cash requirements, if we require capital to meet our future business needs, such capital may not be available to us on terms acceptable to us, or at all. Changes in our credit rating as well as macroeconomic factors such as a general economic downturn may restrict our ability to raise capital in adequate amounts or on terms acceptable to us, and the failure to do so could harm our ability to operate our business.

9

ITEM 1B. Unresolved Staff Comments.

Not applicable.

ITEM 2. Properties.

The Company owns a 70,000 square foot building in Greenville, South Carolina, which is the site of its principal executive and sales offices, and a 103,000 square foot building on adjacent property which it sublets. Prior to February 2008, the Company’s North American distribution facility was located in Memphis, Tennessee. In February 2008, the Company completed the process of relocating its North American distribution operations from this location to its new location in Southaven, Mississippi, allowing for substantially expanded warehousing capacity. The new facility will accommodate approximately 600,000 square feet with an optional 147,000 square feet of available expansion space. In connection with this relocation, the Company entered into a ten year lease, with options to extend the lease for two consecutive five year periods. Shortly after operations commenced in the Southaven facility, the Company completed the sale of its former distribution facility in Memphis, Tennessee.

The Company also leases 22,000 square feet of office and distribution center space in Miami, Florida, 25,000 square feet of office and distribution center space in Mexico City, Mexico, 17,000 square feet of office space in Brussels, Belgium, 8,000 square feet of office space and distribution center space in Egham, England and 1,000 square feet of office space in Eagan, Minnesota. The Company leases approximately 38,000 square feet of third party warehouse space in Liege, Belgium.

The Company has additional sales offices, each of 10,000 square feet or less, in leased facilities in Norcross, Georgia; Williamsville, New York; Bellingham, Washington; Tempe, Arizona; Lenexa, Kansas; Toronto, Canada; Vancouver, Canada; Bad Homburg, Germany; Hull, England; Crawley, England; Olivet, France; and Eindhoven, Netherlands.

Management believes the Company’s office and warehouse facilities are adequate to support its operations at their current levels and for the foreseeable future.

ITEM 3. Legal Proceedings.

On January 24, 2008, the Company announced that it had received written notice from the SEC advising it that the SEC’s investigation concerning the Company’s historical stock option grant practices had been completed and that no enforcement action was recommended.

On March 10, 2008 the Company filed a motion to dismiss consolidated shareholder derivative lawsuits. The original lawsuit was filed on November 21, 2006 by a purported stockholder in the United States District Court for the District of South Carolina in Greenville, South Carolina against certain current and former officers and directors of the Company and against the Company, as a nominal defendant, asserting causes of action based on alleged violations of securities laws (including alleged violations of Section 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC) and other common law claims including, breach of fiduciary duty, aiding and abetting and unjust enrichment relating to allegations concerning certain of the Company’s prior stock option grants. The lawsuit seeks relief in the form of an accounting, rescission, unspecified money damages, disgorgement, attorneys’ fees, fees and expenses and other relief.

On March 25, 2008, the Court confirmed the prior appointment of the plaintiff as lead plaintiff and the consolidation of subsequent actions that related to the same facts. This order effected a consolidation of a second derivative lawsuit that had been filed on April 11, 2007 and was a substantially similar derivative lawsuit to the first action.

The Company’s ongoing costs to defend the derivative litigation are being paid by its insurance carrier. On November 27, 2006 and April 13, 2007, the Company provided notice to its insurance carrier of these actions. The Company’s insurance carrier, subject to a reservation of rights, provided a preliminary position on the coverage of these derivative claims in which the carrier indicated that these lawsuit allegations appear to constitute a claim within coverage of the Company’s insurance policy. The carrier continues to assess coverage of these matters.

10

The Company and its subsidiaries are, from time to time, parties to other lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders.

There have been no matters submitted to a vote of security holders during the last quarter of the fiscal year ended June 30, 2008.

PART II

ITEM 5. Market For Registrant’s Common Equity and Related Stockholder Matters.

The information called for by this Item is incorporated herein by reference to the section entitled “Market for the Registrant’s Common Stock and Related Shareholder Matters” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008.

ITEM 6. Selected Financial Data.

The information called for by this Item is incorporated herein by reference to the section entitled “Selected Financial Data” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information called for by this Item is incorporated herein by reference to the section entitled “Management’s Discussion and Analysis” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

The information called for by this Item is incorporated herein by reference to the section entitled “Quantitative and Qualitative Disclosures About Market Risks” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008.

ITEM 8. Financial Statements and Supplementary Data.

The financial statements listed in Item 15(a)(1) of this Form 10-K are incorporated herein by reference to the corresponding sections of the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008. The financial statement schedule listed in Item 15(a)(2) of this Form 10-K and related Report of Independent Registered Public Accounting Firm are included in this report on pages F-1 and F-2.

11

ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

ITEM 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply judgment in evaluating the cost-benefit relationship of those disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of June 30, 2008, were effective in providing reasonable assurance that the objectives of the disclosure controls and procedures are met.

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2008. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of June 30, 2008.

The effectiveness of our internal control over financial reporting as of June 30, 2008 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report which appears in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008, which is incorporated by reference in this Form 10-K.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information.

Not applicable.

12

PART III

Information called for by Part III (Items 10, 11, 12, 13 and 14) of this report on Form 10-K has been omitted as the Company intends to file with the SEC not later than 120 days after the close of its fiscal year ended June 30, 2008, a definitive Proxy Statement relating to the 2008 Annual Meeting of Shareholders pursuant to Regulation 14A promulgated under the Exchange Act. Such information will be set forth in such Proxy Statement and is incorporated herein by reference.

ITEM 10. Directors, Executive Officers and Corporate Governance.

Incorporated by reference to the information presented under the heading “Directors and Executive Officers of the Registrant” in the Company’s 2008 Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2008.

ITEM 11. Executive Compensation.

Incorporated by reference to the information presented under the heading “Executive Compensation” and “Compensation Committee Report” in the Company’s 2008 Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2008.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference to the information presented under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s 2008 Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2008.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence.

Incorporated by reference to the information presented under the heading “Certain Relationships and Related Transactions” and “Directors and Executive Officers of the Registrant” in the Company’s 2008 Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2008.

ITEM 14. Principal Accounting Fees and Services.

Incorporated by reference to the information presented under the heading “Principal Accountant Fees and Services” in the Company’s 2008 Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2008.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules.

(a)(1) Consolidated Financial Statements: The following financial statements of ScanSource, Inc. and Independent Registered Public Accounting Firm’s Reports are incorporated herein by reference from the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2008:

Reports of Independent Registered Public Accounting Firm

13

Consolidated Balance Sheets as of June 30, 2008 and 2007

Consolidated Income Statements for the years ended June 30, 2008, 2007 and 2006

Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2008, 2007 and 2006

Consolidated Statements of Cash Flows for the years ended June 30, 2008, 2007 and 2006

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedule: The following financial statement schedule of ScanSource, Inc. and related Report of Independent Registered Public Accounting Firm for the years ended June 30, 2008, 2007 and 2006 are presented on pages F-1 and F-2.

Schedule II - Valuation and Qualifying Accounts

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

(a)(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits on pages E-1 to E-3 are filed, or incorporated by reference, as part of this report.

14

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

August 28, 2008

SCANSOURCE, INC.
By:	/s/ MICHAEL L. BAUR
	Michael L. Baur
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ JAMES G. FOODY James G. Foody	Chairman of the Board	August 28, 2008
/s/ MICHAEL L. BAUR Michael L. Baur	Chief Executive Officer and Director (principal executive officer)	August 28, 2008
/s/ RICHARD P. CLEYS Richard P. Cleys	Vice President and Chief Financial Officer, (principal financial and accounting officer)	August 28, 2008
/s/ STEVEN R. FISCHER Steven R. Fischer	Director	August 28, 2008
/s/ MICHAEL J. GRAINGER Michael J. Grainger	Director	August 28, 2008
/s/ JOHN P. REILLY John P. Reilly	Director	August 28, 2008

15

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of ScanSource, Inc.

We have audited the consolidated financial statements of ScanSource, Inc. and subsidiaries as of June 30, 2008 and 2007, and for each of the three years in the period ended June 30, 2008, and have issued our report thereon dated August 27, 2008; such financial statements and report are included in the 2008 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 27, 2008

F-1

SCHEDULE II

SCANSOURCE, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

(In thousands)

Description	Balance at Beginning of Period		Amounts Charged to Expense	Reductions (A)		Recoveries And Other Additions	Balance at End of Period
Valuation account for trade and notes receivable:
Year ended June 30, 2006	$	10,974	2,702	(3,395	)	1,244	$	11,525
Trade and current note receivable allowance							$	11,508
Long-term note allowance							$	17
Year ended June 30, 2007	$	11,525	8,858	(7,392	)	1,629	$	14,620
Trade and current note receivable allowance							$	13,342
Long-term note allowance							$	1,278
Year ended June 30, 2008	$	14,620	6,504	(6,110	)	828	$	15,842
Trade and current note receivable allowance							$	15,842
Long-term note allowance							$	—

^(A) Reductions amounts represent write-offs for the years indicated. For the year ended June 30, 2006, reductions includes approximately $2.8 million payables to customers which was reclassified to other liabilities, net of returns allowance of $2.0 million reclassified from inventory.

F-2

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant and Articles of Amendment Amending the Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by Reference to Exhibit 3.1 to Registrant’s Form 10-Q for the quarter ended December 31, 2004).
3.2	Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2 to Registrant’s Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A).
4.1	Form of Common Stock Certificate (Incorporated by Reference to Exhibit 4.1 to Registrant’s Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A).
10.1†	1993 Incentive Stock Option Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.10 to Registrant’s Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231).
10.2†	1997 Stock Incentive Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Form 10-K for the fiscal year ended June 30, 1999).
10.3†	Amended and Restated 2002 Long-Term Incentive Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed with the Commission on December 11, 2007).
10.4†	Amended and Restated Director’s Equity Compensation Plan. (Incorporated by reference to Annex A to Registrant’s Definitive Proxy Statement filed October 26, 2006).
10.5†	Form of Incentive Stock Option Agreement under the 2002 Long-Term Incentive Plan. (Incorporated by reference to Exhibit 99.1 to Registrant’s Form 8-K filed with the SEC on January 11, 2005).
10.6*†	Form of Incentive Stock Option Agreement for options granted under the 2002 Long-Term Incentive Plan after December 4, 2007.
10.7†	Nonqualified Deferred Compensation Plan effective July 1, 2004. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004).
10.8†	Employment Agreement dated as of January 1, 2004 between the Registrant and Robert S. McLain, Jr. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2004).
10.9†	Employment Agreement Addendum dated as of January 1, 2005 between the Registrant and Robert S. McLain, Jr. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.10†	Employment Agreement dated as of October 13, 2005 between the Registrant and Richard P. Cleys. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005).
10.11†	Employment Agreement dated as of October 13, 2005 between the Registrant and Michael L. Baur. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005).
10.12†	Employment Agreement Addendum dated as of January 1, 2006 between the Registrant and Robert S. McLain, Jr. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2006).

E-1

10.13†	Employment Agreement dated as of June 20, 2007 between the Registrant and R. Scott Benbenek. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2007).
10.14†	Employment Agreement dated as of June 20, 2007 between the Registrant and Andrea D. Meade. (Incorporated by reference to Exhibit 10.16 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2007).
10.15†	Form of Amendment to Stock Option Agreement and Promise to Make Cash Payment for Andrea Meade and Scott Benbenek. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended December 31, 2007).
10.16†	Amendment to Stock Option Agreement and Promise to Make Cash Payment for Richard Cleys and Bobby McLain. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended December 31, 2007).
10.17†	Description of Option Remediation for Certain Executive Officers and Directors. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended December 31, 2007).
10.18*†	Amended and Restated Employment Agreement effective as of June 30, 2008 between the Registrant and Richard P. Cleys.
10.19*†	Amended and Restated Employment Agreement effective as of June 30, 2008 between the Registrant and Michael L. Baur.
10.20	Amended and Restated Credit Agreement dated as of July 16, 2004 among ScanSource, Inc., Netpoint International, Inc., 4100 Quest, LLC, and Partner Services, Inc., ScanSource Europe SPRL, ScanSource Europe Limited and ScanSource UK Limited, Branch Banking and Trust Company of South Carolina, as Administrative Agent and a Bank, Wachovia Bank, National Association, as Syndication Agent and an Other Currency Lender, and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank as Banks. (Incorporated by reference to Exhibit 10.19 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2004).
10.21	First Amendment dated as of May 13, 2005 to Amended and Restated Credit Agreement dated as of July 16, 2004 among ScanSource, Inc., Netpoint International, Inc., 4100 Quest, LLC and Partner Services, Inc., ScanSource Europe SPRL, ScanSource Europe Limited and ScanSource UK Limited, Branch Banking and Trust Company of South Carolina, as Administrative Agent and a Bank, Wachovia Bank, National Association, as Syndication Agent and an Other Currency Lender, and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank as Banks. (Incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2005).
10.22	Agreement for Purchase and Sale dated as of September 22, 2005 between the Registrant’s wholly owned subsidiary, Logue Court Properties, LLC, and Robert W. Bruce, and Camperdown Company, Inc. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005).
10.23	Letter Agreement and Consent dated July 3, 2006 amending the Amended and Restated Credit Agreement dated as of July 16, 2004 among ScanSource, Inc., Netpoint International, Inc., 4100 Quest, LLC, and Partner Services, Inc., ScanSource Europe SPRL, ScanSource Europe Limited and ScanSource UK Limited, Branch Banking and Trust Company of South Carolina, as Administrative Agent and a Bank, Wachovia Bank, National Association, as Syndication Agent and an Other Currency Lender, and Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (formerly Hibernia National Bank) as Banks. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2006).

E-2

10.24	Waivers dated as of November 9, 2006 to Amended and Restated Credit Agreement dated as of July 16, 2004, as amended, among ScanSource, Inc., Netpoint International, Inc., Scansource Europe Limited, Scansource UK Limited, 4100 Quest, LLC, Partner Services, Inc. and T2 Supply, Inc., Branch Banking and Trust Company of South Carolina, Wachovia Bank, National Association, Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended December 31, 2006).
10.25	Amendment dated as of February 14, 2007 to Amended and Restated Credit Agreement dated as of July 16, 2004, as amended, among ScanSource, Inc., Netpoint International, Inc., Scansource Europe Limited, Scansource UK Limited, 4100 Quest, LLC, Partner Services, Inc. and T2 Supply, Inc., Branch Banking and Trust Company of South Carolina, Wachovia Bank, National Association, Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2007).
10.26	Waivers dated as of February 14, 2007 to Amended and Restated Credit Agreement dated as of July 16, 2004, as amended, among ScanSource, Inc., Netpoint International, Inc., Scansource Europe Limited, Scansource UK Limited, 4100 Quest, LLC, Partner Services, Inc. and T2 Supply, Inc., Branch Banking and Trust Company of South Carolina, Wachovia Bank, National Association, Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2007).
10.27	Third Amendment dated as of April 20, 2007 to its Amended and Restated Credit Agreement dated as of July 16, 2004, as amended, among ScanSource, Inc., Netpoint International, Inc., Scansource Europe Limited, Scansource UK Limited, 4100 Quest, LLC, Partner Services, Inc. and T2 Supply, Inc., Branch Banking and Trust Company of South Carolina, Wachovia Bank, National Association, Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (formerly Hibernia National Bank) as Banks. (Incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2007).
10.28+	Industrial Lease Agreement dated April 27, 2007 between the Registrant and Industrial Developments International, Inc. (Incorporated by reference to Exhibit 10.26 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2007).
10.29	Waivers dated as of May 14, 2007 to Amended and Restated Credit Agreement dated as of July 16, 2004, as amended, among ScanSource, Inc., Netpoint International, Inc., Scansource Europe Limited, Scansource UK Limited, 4100 Quest, LLC, Partner Services, Inc. and T2 Supply, Inc., Branch Banking and Trust Company of South Carolina, Wachovia Bank, National Association, Fifth Third Bank, First Tennessee Bank National Association and Capital One, N.A. (Incorporated by reference to Exhibit 10.28 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2007).
10.30	Credit Agreement dated as of September 28, 2007, among ScanSource, Inc., the Subsidiary Borrowers party thereto, the Lenders party thereto and, J.P. Morgan Chase Bank, N.A. as Administrative Agent, Swingline Lender and Issuing Bank, Wachovia Bank, N.A. as Syndication Agent, and Regions Bank and Wells Fargo Bank, N.A. as Co-Documentation Agents, J.P. Morgan Securities Inc., as Sole Bookrunner and Sole Lead Arranger. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with Commission on October 1, 2007).
10.31*	Purchase and Sale Agreement dated December 13, 2007 between 4100 Quest, LLC, a wholly owned subsidiary of ScanSource, Inc., and Kansas City Life Insurance Company.
10.32*	Amendment dated as of January 18, 2008 to Purchase and Sale Agreement dated December 13, 2007 between 4100 Quest, LLC and Kansas City Life Insurance Company.
10.33*	Amendment dated as of January 30, 2008 to Purchase and Sale Agreement dated December 13, 2007 between 4100 Quest, LLC and Kansas City Life Insurance Company.
13.1*	The Registrant’s Annual Report to Shareholders for the Fiscal Year Ended June 30, 2008.
21.1*	Subsidiaries of the Company.
23.1*	Consent of Ernst & Young LLP.
31.1*	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer of ScanSource, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer of ScanSource, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

† Management contract or compensatory plan or arrangement.

+ Confidential treatment has been granted by the Commission with respect to certain information in this exhibit pursuant to a confidential treatment request.

E-3

EX-10.6

Exhibit 10.6

INCENTIVE STOCK OPTION

Non-transferable

GRANT TO

(“Optionee”)

the right to purchase from ScanSource, Inc. (the “Company”)

shares of its common stock, no par value, at the price of $             per share

pursuant to and subject to the provisions of the ScanSource, Inc. 2002 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth on the following page.

By accepting the Options, Optionee shall be deemed to have agreed to the terms and conditions set forth in this Award Certificate and the Plan.

Unless vesting is accelerated in accordance with the Plan, the Options shall vest (become exercisable) in accordance with the following schedule:

Continuous Status as a Participant after Grant Date Percent of Option Shares Vested

IN WITNESS WHEREOF, ScanSource, Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be executed as of the Grant Date.

SCANSOURCE, INC.
By:
Its:	Authorized Officer

Grant Date:

- 1 -

TERMS AND CONDITIONS

1. Grant of Option. ScanSource, Inc. (the “Company”) hereby grants to the Optionee named on Page 1 hereof (“Optionee”), under the ScanSource, Inc. 2002 Long-Term Incentive Plan (the “Plan”), stock options to purchase from the Company (the “Options”), on the terms and on conditions set forth in this certificate (this “Award Certificate”), the number of shares indicated on Page 1 of the Company’s no par value common stock, at the exercise price per share set forth on Page 1. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

2. Vesting of Options. The Options shall vest (become exercisable) in accordance with the schedule shown on page 1 of this Award Certificate. Notwithstanding the foregoing vesting schedule, upon Optionee’s death or Disability during his or her Continuous Status as a Participant, or upon Optionee’s Retirement, or if Optionee’s employment is terminated by the Company without Cause or by Optionee for Good Reason within twelve (12) months after the effective date of a Change in Control, all Options shall become fully vested and exercisable.

3. Term of Options and Limitations on Right to Exercise. The term of the Options will be for a period of ten years, expiring at 5:00 p.m., Eastern Time, on the tenth anniversary of the Grant Date (the “Expiration Date”). To the extent not previously exercised, the Options will lapse prior to the Expiration Date upon the earliest to occur of the following circumstances:

(a) Three months after the termination of Optionee’s Continuous Status as a Participant for any reason other than (i) termination for Cause or (ii) by reason of Optionee’s death or Disability.

(b) Twelve months after the date of the termination of Optionee’s Continuous Status as a Participant by reason of Disability.

(c) Twelve months after the date of Optionee’s death, if Optionee dies while employed, or during the three-month period described in subsection (a) above or during the twelve-month period described in subsection (b) above and before the Options otherwise lapse. Upon Optionee’s death, the Options may be exercised by Optionee’s beneficiary designated pursuant to the Plan.

(d) 5:00 p.m., Eastern Time, on the date of the termination of Optionee’s Continuous Status as a Participant if such termination is for Cause.

Subject to compliance with Section 409A of the Code, the Committee may, prior to the lapse of the Options under the circumstances described in sections (a), (b), (c) or (d) above, extend the time to exercise the Options as determined by the Committee in writing, but if the Options are so extended, then to the extent that they are exercised more than three months after the termination of Optionee’s employment other than by death or Disability, or more than one year after Optionee’s Disability, the Options will automatically become Non-Qualified Stock Options. If Optionee returns to employment with the Company during the designated post-termination exercise period, then Optionee shall be restored to the status Optionee held prior to such termination but no vesting credit will be earned for any period Optionee was not in Continuous Status as a Participant. If Optionee or his or her beneficiary exercises an Option after termination of service, the Options may be exercised only with respect to the Shares that were otherwise vested on Optionee’s termination of service, including Options vested by acceleration under section 2.

4. Exercise of Option. The Options shall be exercised by (a) written notice directed to the Secretary of the Company or his or her designee at the address and in the form specified by the Secretary from time to time, and (b) payment to the Company in full for the Shares subject to such exercise (unless the exercise is a broker-assisted cashless exercise, as described below). If the person exercising an Option is not Optionee, such person shall also deliver with the notice of exercise appropriate proof of his or her right to exercise the Options. Payment for such Shares shall be in (a) cash, (b) Shares previously acquired by the purchaser, (c) withholding of Shares from the Options, or (d) any combination thereof, for the number of Shares specified in such written notice. The value of surrendered Shares for this purpose shall be the Fair Market Value as of the last trading day immediately prior to the exercise date. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws and any limitations as may be applied from time to time by the Committee (which need not be uniform), the Options may be exercised through a broker in a so-called “cashless exercise” whereby the broker sells the Option Shares on behalf of Optionee and delivers cash sales proceeds to the Company in payment of the exercise price. In such case, the date of exercise shall be deemed to be the date on which notice of exercise is received by the Company and the exercise price shall be delivered to the Company by the settlement date.

- 2 -

5. Notification of Disposition. Optionee agrees to notify the Company in writing within 30 days of any disposition of Shares acquired by Optionee pursuant to the exercise of the Options, if such disposition occurs within two years of the Grant Date, or one year of the date of exercise, of the Options. The Company has the authority and the right to deduct or withhold, or require Optionee to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes required by law to be withheld with respect to any disposition of Shares prior to the expiration of two years of the Grant Date, or one year of the date of exercise, of the Options.

6. Beneficiary Designation. Optionee may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of Optionee hereunder and to receive any distribution with respect to the Options upon Optionee’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights hereunder is subject to all terms and conditions of this Award Certificate and the Plan and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives Optionee, the Options may be exercised by the legal representative of Optionee’s estate, and payment shall be made to Optionee’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by Optionee at any time provided the change or revocation is filed with the Company.

7. Limitation of Rights. The Options do not confer to Optionee or Optionee’s beneficiary designated pursuant to section 6 any rights of a shareholder of the Company unless and until Shares are in fact issued to such person in connection with the exercise of the Options. Nothing in this Award Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate Optionee’s service at any time, nor confer upon Optionee any right to continue in the service of the Company or any Affiliate.

8. Restrictions on Transfer and Pledge. No right or interest of Optionee in the Options may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of Optionee to any other party other than the Company or an Affiliate. The Options are not assignable or transferable by Optionee other than by will or the laws of descent and distribution. The Options may be exercised during the lifetime of Optionee only by Optionee.

9. Interpretation. It is the intent of the parties hereto that the Options qualify for incentive stock option treatment pursuant to, and to the extent permitted by, Section 422 of the Code. All provisions hereof are intended to have, and shall be construed to have, such meanings as are set forth in applicable provisions of the Code and Treasury Regulations to allow the Options to so qualify. To the extent that such any portion of the Options fail to qualify for incentive stock option treatment pursuant to Section 422 of the Code, such nonqualifying portion of the Options shall be Non-Qualified Stock Options, governed under Section 83 of the Code.

10. Plan Controls. The terms contained in the Plan are incorporated into and made a part of this Award Certificate and this Award Certificate shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Certificate, the provisions of the Plan shall be controlling and determinative.

11. Successors. This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.

12. Severability. If any one or more of the provisions contained in this Award Certificate is invalid, illegal or unenforceable, the other provisions of this Award Certificate will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.

13. Notice. Notices and communications under this Award Certificate must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to: ScanSource, Inc., 6 Logue Court, Greenville, SC 29615, Attn: Secretary, or any other address designated by the Company in a written notice to Optionee. Notices to Optionee will be directed to the address of Optionee then currently on file with the Company, or at any other address given by Optionee in a written notice to the Company.

- 3 -

EX-10.18

Exhibit 10.18

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) between ScanSource, Inc., a South Carolina corporation (“Company”), and Richard P. Cleys (“Executive”) (collectively “the Parties”) is effective as of June 30, 2008 (“Effective Date”) as an amendment and restatement of the Employment Agreement originally dated as of October 13, 2005, between the Company and Executive.

BACKGROUND

The Company desires to employ Executive as Vice President and Chief Financial Officer, and Executive is willing to serve in such capacity, in accordance with the terms and conditions of this Agreement.

In consideration of the foregoing and of the mutual commitments below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Employment. On the Effective Date, Executive will be employed in the capacity stated above with such commensurate responsibilities as are assigned to him by the Company’s Board of Directors (“Board”) or Chief Executive Officer (“CEO”). Executive will report directly to the CEO.

2. Employment Period. Unless earlier terminated in accordance with Section 5, Executive’s employment will be for a term (the “Employment Period”), beginning on the Effective Date and ending three years after the Effective Date, the Employment Period End Date. Provided, however, that if a Change in Control, as defined in Exhibit C hereto, occurs during the Employment Period, the ending date of the Employment Period will be extended so that it expires on the later of the Employment Period End Date or the first anniversary of the date on which the Change in Control initially occurred.

3. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which. Executive is entitled, Executive agrees to devote his business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder. Provided, however, that it shall not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and/or (ii) manage personal business interests and investments, so long as these activities do not interfere with the performance of Executive’s responsibilities under this Agreement.

4. Compensation and Benefits

(a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary at the rate specified on Exhibit A (“Base Salary”), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The Board Compensation

Committee will review Executive’s Base Salary annually and in their sole discretion may increase (but not decrease) Executive’s Base Salary from year to year. This annual review of Executive’s Base Salary will consider, among other things, Executive’s performance and the Company’s performance. If Executive becomes eligible during the Employment Period to receive benefits under the Company’s short-term disability policy, the Company will continue to pay Executive’s Base Salary; provided, however, that Executive’s Base Salary during such period will be reduced by any amounts Executive receives under the short-term disability policy.

(b) Variable Compensation Savings and Retirement Plans. During the Employment Period, Executive will be entitled to participate in all deferred compensation, savings and retirement plans, practices, policies and programs applicable to senior executive officers of the Company (“Peer Executives”) pursuant to their terms. The Executive will also be eligible to receive certain variable compensation (“Variable Compensation”) based on financial and/or performance criteria established periodically by the Board Compensation Committee, as specified on Exhibit A.

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s eligible dependents may participate pursuant to their terms in the welfare benefit plans, practices, policies and programs provided by the Company which may include, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent applicable to Peer Executives. Contributions will be required by the Executive. The Company may, in its sole discretion, modify, change, or eliminate its Welfare Plans.

(d) Expenses. During the Employment Period, Executive will be entitled to receive reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company, and such reimbursements will be made no later than the last day of the year immediately following the year in which Executive incurs the reimbursable expense.

(e) Fringe Benefits. During the Employment Period, Executive will be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company in effect for Peer Executives.

(f) Vacation. During each fiscal year during the Employment Period, Executive will he entitled to the number of days of paid vacation specified on Exhibit A. Executive may take vacation at the tines Executive reasonably requests, subject to the prior approval of the person specified on Exhibit A. Unused vacation time will not carry over to the next fiscal year and will not be paid upon termination of employment.

5. Termination of Employment.

(a) Death Retirement or Disability. Executive’s employment terminates automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement “Retirement” means normal retirement as defined in the

2

Company’s retirement plan in effect when Executive retires, or if there is no retirement plan, “Retirement” will mean the Executive’s voluntary termination of employment after age 55 with fifteen years of service. If the Company determines that the Executive has become disabled during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive’s employment. Executive’s employment with the Company will terminate effective on the 30th day after receipt of such written notice by Executive (“Disability Effective Date”), unless, within the 30 days after such receipt, Executive has returned to fill-time performance of Executive’s duties. For purposes of this Agreement, “Disability” means a mental or physical disability as determined by the Board in accordance with standards and procedures similar to those under the Company’s long-term disability plan, if any. If the Company has no long-term disability plan, “Disability” will mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental condition which has lasted (or can reasonably be expected to last) for twelve workweeks in any twelve-month period. At the request of Executive or his personal representative, the Board’s determination that the Disability of Executive has occurred will be certified by two physicians mutually agreed upon by Executive, or his personal representative, and the Company. If the two physicians are unwilling to certify that the Executive is disabled, Executive’s termination will be deemed a termination by the Company without Cause and not a termination because of his Disability.

(b) Termination by the Company. The Company may terminate Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” means:

(i) the failure of Executive to satisfactorily perform Executive’s duties with the Company (other than failure resulting from incapacity due to Disability), after a written demand for satisfactory performance is delivered to Executive by the Board and the CEO, which specifically identifies the manner in which the Board and CEO believe that Executive has not satisfactorily performed Executive’s duties. The decision of whether Executive has satisfactorily performed his duties with the Company or complied with the demand for satisfactory performance is in the sole discretion of the Company;

(ii) engaging in unethical or illegal conduct or misconduct that includes but is not limited to violations of the Company’s policies concerning employee conduct; or

(iii) the Executive’s breach of any term of this Agreement.

(c) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” means:

(i) without the consent of Executive, the assignment to Executive of any duties materially inconsistent for Peer Executives, excluding an isolated, insubstantial, and inadvertent action taken in good faith which is remedied by the Company promptly after receipt of notice from Executive;

3

(ii) a material reduction by the Company in Executive’s Base Salary or a material reduction in Executive’s Variable Compensation opportunity;

(iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive’s total base compensation, unless the Company provides a substantially equivalent alternative plan, or (b) to continue Executive’s participation in the alternative plan on a basis that is substantially equivalent in terms of the value of benefits provided;

(iv) the Company’s requiring Executive, without his consent to be based at any location that increases Executive’s normal work commute by fifty (50) miles or more as compared to Executive’s normal work commute or otherwise is a material change in the location at which Executive is based;

(v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement;

(vi) the material breach of this Agreement by the Company; or

(vii) if no new employment agreement has been entered into by Executive and the Company or its successor after or in contemplation of a Change in Control, termination by Executive for any reason or no reason during the 60-day period beginning on the sixth-month anniversary of a Change in Control

Executive must provide written notice to the Company of Executive’s intent to terminate employment for Good Reason within 30 days of the initial existence of the Good Reason. The Company will have an opportunity to cure any claimed event of Good Reason within 30 days of notice from Executive. The Board’s good faith determination of cure will be binding. The Company will notify Executive in writing of the timely cure of any claimed event of Good Reason and how the cure was made. Any Notice of Termination delivered by Executive based on a claimed Good Reason which was thereafter cured by the Company will be deemed withdrawn and ineffective to terminate this Agreement. If the Company fails to cure any claimed event of Good Reason within 30 days of notice from Executive, Executive must terminate employment for such claim of Good Reason within 180 days of the initial existence of the Good Reason, and if Executive fails to do so, such claimed event of Good Reason will be deemed withdrawn and ineffective to terminate this Agreement.

(d) Notice of Termination. Any termination of Executive’s employment by the Company or by Executive must be communicated by Notice of Termination to the

4

other Party in accordance with Section 13(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) states the specific termination provision in this Agreement relied upon, including whether such termination is for Cause or Good Reason, (ii) if such termination is for Cause or Good Reason, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provisions so indicated, and (iii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause will not waive any right of Executive or the Company, or preclude Executive or the Company from asserting applicable facts or circumstances in enforcing rights under this Agreement.

(e) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination or, if Executive’s employment is terminated by reason of death, Retirement or Disability, the date of death or Retirement or the Disability Effective Date.

6. Obligations of the Company upon Termination.

(a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause, Death, Disability, Retirement, or Normal Expiration of Employment Period. If, during the Employment Period: (i) the Company terminates Executive’s employment other than for Cause, death, Disability, or Retirement, or (ii) Executive terminates employment for Good Reason following the Company’s failure to cure such Good Reason as set forth in Section 5(c) of this Agreement, the Company will pay Executive the following amounts and provide the following benefits:

(i) Executive’s Base Salary earned through the Date of Termination to the extent not already paid (such amount is hereinafter referred to as the “Accrued Obligations”) will be paid as soon as practicable after the Date of Termination per the Company’s customary payroll practices;

(ii) to the extent not previously paid or provided and only if earned as of the Date of Termination, the Company will timely pay or provide to Executive any other amounts or benefits which Executive is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company (“Other Benefits”) pursuant to the terms of such Other Benefits; and

(iii) subject to Section 13(i) of this Agreement and Executive’s execution of a Release in substantially the form of Exhibit B hereto (the “Release”) within the time set forth in Section 6(g) of this Agreement, on the 30^th day after the Date of Termination, the Company will pay to Executive in a lump sum in cash the amount in (A), pay the amount in (B) as set forth below, and provide the benefits in (C):

5

(A) the amount equal to the greater of (a) one or (b) the number of full months remaining between the Date of Termination and the Employment Period End Date, divided by 12, times the highest combined annual Base Salary and Variable Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination (the “Severance Benefits”), less normal withholdings. Notwithstanding the foregoing, if the Date of Termination occurs within 12 months after or otherwise in contemplation of a Change in Control, as defined in Exhibit C, Executive will receive Severance Benefits in an amount equal to two times the highest combined annual Base Salary and Variable Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination, less normal withholdings. Executive’s entitlement to receive and retain the amounts set forth in this Section 6 are conditioned on Executive’s compliance with the Restrictions on Conduct described in Section 11;

(B) a bonus equal to the pro rata portion (based on the number of days elapsed in the current fiscal year through the Date of Termination) of the current fiscal year annual variable compensation, if any, that would otherwise be payable if the Executive had continued employment through the end of the current fiscal year, based on actual performance (the “Pro Rata Bonus”), The Pro Rata Bonus, less normal withholdings will be paid at the normal time for payment of annual bonuses as if Executive had continued employment through the time of payment of the bonus, which will be no later than the later of March 15 following the end of the calendar year in which Executive’s right to the bonus vests or the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to the bonus vests; and

(C) for up to twelve (12) months following the Date of Termination, the Company will reimburse Executive on a monthly basis for COBRA payments made by Executive which are in excess of the monthly rates paid by active employees, for medical and dental insurance benefits. Reimbursement may cease sooner than twelve (12) months if Executive becomes eligible to receive similar benefits under another employer provided or group plan (which may be the plan of the Executive’s new employer or his spouse’s employer) and, in such event, Executive’s right to COBRA ceases, Such cash reimbursements will be made per the Company’s customary payroll practices (not less frequently than monthly) for up to the twelve (12) months following the Date of Termination.

(b) Death. If Executive’s employment is terminated because of Executive’s death during the Employment Period, this Agreement will terminate without further obligations to Executive’s legal representatives under this Agreement other than (i) the

6

payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The Accrued Obligations and the Pro Rata Bonus will be paid to Executive’s estate or beneficiary, as applicable. Other Benefits as used in this Section 6(b) will include, without limitation, and Executive’s estate and/or beneficiaries will be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as are applicable to Executive on the date of his death pursuant to the terms of such Other Benefits.

(c) Disability. If Executive’s employment is terminated because of Executive’s Disability during the Employment Period, this Agreement will terminate without further obligations to Executive other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The term Other Benefits as used in this Section 6(c) includes, without limitation, and Executive will be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as are applicable to Executive and his family on the Date of Termination pursuant to the terms of such Other Benefits.

(d) Retirement. If Executive’s employment is terminated because of Executive’s Retirement during the Employment Period, this Agreement will terminate without further obligations to Executive other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The term Other Benefits as used in this Section 6(d) includes, without limitation, and Executive will be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination pursuant to the terms of such Other Benefits.

(e) Cause or Voluntary Termination without Good Reason. If Executive’s employment is terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), and (ii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii).

(f) Normal Expiration of Employment Period. If Executive’s employment is terminated due to the normal expiration of the Employment Period or is terminated within 60 days after the Employment Period End Date (for reasons other than Cause, death, Disability or Retirement), this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in

7

Section 6(a)(iii)(B), (iii) the payment of the Severance Benefits (subject to the Executive’s execution of the Release) as described in Section 6(a)(iii)(A), and (iv) the timely payment or provision of Other Benefits as described in Section 6(a)(ii). Notwithstanding anything to the contrary in this Agreement, if the Company provides notice that the Agreement will not be renewed and a new employment agreement is not offered and the Executive remains an employee of the Company in any capacity, Executive’s employment will not be governed by this Agreement and Executive will be an at-will employee. In that instance, Executive remains subject to the Restrictions on Conduct described in Section 11.

(g) Execution of Release. Notwithstanding anything to the contrary in this Section 6, the Release must be executed and provided to the Company, and the period for revoking same must have expired, before the 30^th day following the Date of Termination.

7. Non-exclusivity of Rights. Nothing in this Agreement prevents or limits Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company and for which Executive may qualify, nor, subject to Section 13(d), will anything in this Agreement limit or otherwise affect any rights Executive may have under any contract or agreement with the Company, Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice, program, contract or agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement.

8. Mandatory Reduction of Payments in Certain Events. Any payments made to Executive under this Agreement will be made with the Executive’s best interests in mind related to the excise tax imposed by Code Section 4999 (the “Excise Tax”).

(a) Anything in this Agreement to the contrary notwithstanding if it is determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a “Payment”) would be subject to the Excise Tax, then, before making the Payment to Executive, a calculation will be made comparing (i) the net benefit to Executive of all Payments after payment of the Excise Tax, to (ii) the net benefit to Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax, If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments will be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”), In that event, Executive will direct which Payments are to be reduced and any such reduction will be made so as not to violate Code Section 409A.

(b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to in Section 8(a)(i) and (ii) above will be made by the Company’s regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the “Accounting

8

Firm”) which will provide detailed supporting calculations. Any determination by the Accounting Firm will be binding upon the Company and Executive. As a result of the uncertainty in the application of Code Section 4999 at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments to which Executive was entitled, but did not receive pursuant to Section 8(a), could have been made without the imposition of the Excise Tax (“Underpayment”). In such event, the Accounting Firm will determine the amount of the Underpayment that has occurred and any such Underpayment will be promptly paid by the Company to or for the benefit of Executive.

(c) If the provisions of Code Section 280G and 4999 or any successor provisions are repealed without succession, this Section 8 will be of no further force or effect.

9. Costs of Enforcement. Subject to Section 8(b), each party will pay its own costs and expenses incurred in enforcing or establishing its rights under this Agreement, including, without limitation, attorneys’ fees, whether a suit is brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings.

10. Representations and Warranties. Executive represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any restrictive covenant not to compete, not to solicit or not to disclose or use confidential information, with any person or entity, and Executive’s execution of this Agreement and performance of his obligations will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

11. Restrictions on Conduct of Executive.

(a) General. Executive agrees that as part of the services he will perform for the Company he will be exposed to, and help create and maintain, competitive advantages over other “Competitive Businesses,” as well as good will with the Company’s customers and suppliers. By virtue of the position Executive will hold, Executive is receiving, will receive, or will be provided access to the Company’s: (1) customers, suppliers, advertisers, and vendors as well as pricing information, distribution channels, and other terms of those relationships; (2) “Confidential Information” and “Trade Secrets;” (3) the relationships and other elements that together comprise good will; and/or (4) institutional knowledge regarding product development, its engineering, product specification, material suppliers, material specifications, product suppliers, manufacturing knowledge, customer feedback, surveys, design-around information, research and development information, internal quality control tests, other quality control information, and other similar information. Executive agrees that the competitive advantage and goodwill in the Company has created, and which Executive will assist in furthering and maintaining, is an important and legitimate business asset of the Company. Should Executive compete against the Company, having intimate knowledge of the information that gives the Company its competitive advantage and good will would give Executive, or those “Competitive Businesses” he is assisting, an unfair advantage over the Company.

9

(b) Definitions. The following capitalized terms used in this Section 11 will have the meanings assigned to them below, which definitions will apply to both the singular and the plural forms of these terms:

“Competitive Business” — means any entity that manufactures, markets, sells, or distributes (or is planning to do any of the foregoing) any goods or services in or to the point of sale, automatic identification, data capture, security, business telephony, communication products and peripherals markets if such entity manufactures, markets, sells, or distributes (or is attempting to do any of the foregoing) any product that is the same or similar to any good or service offered by the Company, including reasonable alternatives, within the final two (2) years of Executive’s employment with the Company. Competitive Business also includes any supplier to any manufacturer of a product that is the same as, or similar to, or considered a reasonable alternative to a Company product that was manufactured, sold, offered or distributed by the Company within the final two (2) years of Executive’s employment with the Company. Executive agrees that Competitive Businesses include, but are not limited to, the following entities: Ingram Micro, Tech Data, Avnet, BlueStar, Westcon, Voda One, Arrow, Agilysis, Azerty, PC POS, Jarltech, Jenne, Securematics, Synnex, Alliance (NEI), NETXUSA, ADI, Tri-Ed, Northern Video, and Anixter. Regarding Competitive Businesses that have distinct business units or divisions that are not competitive with the Company, the Company may make exceptions by consent of the CEO that allow Executive to work for such non-competitive business units or divisions during the Restricted Period.”

“Confidential information” means any and all information of the Company that has value and is not generally known to the Company’s competitors. This includes, but is not limited to, any information or documents about the Company’s accounting practices; financial data; financial plans and practices; the Company’s operations; its future plans (including new products, improved products, and products under development); its methods of doing business; internal forms, checklists, or quality assurance testing; programs; customer and supplier lists or other such related information as pricing or terms of business dealings; supply chains; shipping chains and prices; packaging technology or pricing, sourcing information for components, materials, supplies, and other goods; employees; pay scales; bonus structures; contractor information and lists; marketing strategies and information; product plans; distribution plans and distribution channel relationships; business plans; manufacturing, operation, sales and distribution processes; costs; margins for products; prices, sales, orders and quotes for the Company’s business that is not readily attainable by the general public; existing and future services; testing information (including methods and results) related to materials used in the development of the Company’s products or materials that could be used with the Company’s products; development

10

information (including methods and results) related to computer programs that design or test products or that track information from a central database; and the computer or electronic passwords of all employees and/or firewalls of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive, is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information other than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

“Prohibited Duties” means supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for a Competitive Business that is similar or related to one or more duties Executive performed or supervised for the Company. Prohibited duties include owning greater than 10% of any Competitive Business. Prohibited duties includes supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for any material, product or service provider of any Competitive Business, if Executive’s work for such material, product or service provider is associated with a Competitive Business.

“Restricted Territory” means any place where the Company or its affiliates is (or is attempting to) actively manufacturing, marketing, selling, or distributing its products within the final two (2) years of Executive’s employment or places where the Company made affirmative steps to market or sell its products within the final six (6) months of Executive’s employment. If Executive was assigned only a portion of the territory in which the Company operates or sells, then the Restricted Territory will he narrowly construed to include only the limited territory of the Executive.

“Trade Secrets” means information related to the business or services of the Company which (1) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reasonable reverse engineering processes by persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts by the Company and affiliated third parties that are reasonable under the circumstances to maintain its secrecy. Assuming the foregoing criteria in clauses (1) and (2) are met, Trade Secret encompasses business and technical information including, without limitation, know-how, designs, formulas, patterns, compilations, programs, devices, inventions, methods, techniques, drawings processes, finances, actual or potential customers and suppliers, and existing and

11

future products and services of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive; is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information through some avenue other than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

(c) Restrictions. Executive understands and agrees that the compensation the Company has agreed to provide pursuant to this Agreement would not be as lucrative if the restrictions set forth in this section were not included in this Agreement. Therefore, in consideration of the compensation provided in this Agreement, and the other terms agreed to by the Company, along with the disclosure (and continued disclosure of Confidential Information and Trade Secrets) a portion of which is being paid to compensate executive for these covenants, Executive covenants and agrees as follows:

(i) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not engage in any Prohibited Duties for a Competitive Business in the Restricted Territory;

(ii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s customers or suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s prospective customers or prospective suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iv) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Termination Date, Executive agrees he will not solicit any of the Company’s employees whom Executive supervised during the course of his employment with the Company, any employees with whom he had contact during his employment, any employees who had contacts of employment with the Company at the time solicited, or any employees who had restrictive covenants at the time solicited, to leave the Company for any purpose;

12

(v) for the term of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, publish, disseminate, provide, or otherwise disclose any Confidential Information or Trade Secrets to any third party, unless required to do so by legal process or other law, without the Company’s prior written consent. Executive agrees that if he believes he is compelled to reveal Confidential Information or Trade Secrets pursuant to the limited exception provided herein, Executive will provide the Company at least 7 days advance notice before doing so, and will explain the specifics under which such Confidential Information or Trade Secrets are to be disclosed.

(vi) For the tem of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, for his own behalf or otherwise, use in any manner the Company’s Confidential Information or Trade Secrets.

(d) Non-Disparagement. The Company and Executive agree that for the term of Employee’s employment, and for a period of five (5) years thereafter, they will not disparage each other to any non-governmental third parties. Nothing in this subsection should be interpreted as any restriction on either Party’s compliance with any laws requiring or compelling disclosure, or any disclosures that are considered absolutely privileged, such as legal proceedings.

(e) Blue Pencil. The Company and Executive agree that the provisions of Section 11, including all subparts, are intended to strike the balance between Executive earning a livelihood and the Company protecting its important competitive advantages and good will. The Parties have drafted the provisions of Section 11, including all subparts, to allow for enforcement. The Parties agree that should a court determine that any word, phrase, clause, sentence, or paragraph is unreasonably broad in time, territory, or scope so as to render any remaining provisions unenforceable, the Parties desire the court to strike the offending language in the narrowest way possible and enforce the remainder as if the offending language was not there, so that only reasonable restrictions are enforced.

(f) Elective Right of the Company. If Executive challenges the enforceability of the Restrictive Covenants (or asserts an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are (i) not enforceable as a matter of law, (ii) unreasonable in geographical scope or duration or (iii) void as against public policy, the Company will have the right (1) to cease making the payments required under Section 6 above, and (2) upon demand, to have Executive repay, within 10 business days of any such demand, any payments

13

already made. Any right afforded to, or exercised by, the Company under this Agreement will not affect the enforceability of the Restrictive Covenants or any other right of the Company under this Agreement.

14

12. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company will not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by Executive’s legal representatives.

(b) This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” will mean the Company as herein before defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

13. Miscellaneous.

(a) Waiver. Failure of either Party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement will not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless the waiver is in a writing signed by the Party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which will remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Parties on the subject matter hereof. From and after the Effective Date, this Agreement will supersede any other agreement between the Parties on the subject matter hereof, including without limitation, any prior Agreement.

(e) Governing Law and Jurisdiction. Without regard to conflict of laws principles, the laws of the State of South Carolina will govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. This

15

Agreement may only be enforced in a court of competent jurisdiction in Greenville County, South Carolina and Executive agrees to submit to the exclusive jurisdiction of a court of competent jurisdiction Greenville, South Carolina.

(f) Notices. All notices, requests, demands and other communications required or permitted in this Agreement must be in writing and will be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:

To Company:	ScanSource, Inc.
	6 Logue Court
	Greenville, SC 29615
	Attn: General Counsel
To Executive:	To the address specified on Exhibit A

Any Party may change the address to which notices, requests, demands and other communications will be delivered or mailed by giving notice thereof to the other Party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both Parties, which makes specific reference to this Agreement.

(h) Construction. Each Party and his or its counsel have been provided the opportunity to review and revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party will not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement will be construed as a whole, and according to its fair meaning, and not strictly for or against either party.

(i) Deferred Compensation Provision. Notwithstanding any other provision of this Agreement, it is intended that any payment or benefit provided under this Agreement that is considered to be “deferred compensation” subject to Code Section 409A will be provided in such manner and at such time, including without limitation in connection with a permissible payment event under Code Section 409A, as is exempt from or complies with the requirements of Code Section 409A. All rights to payments and benefits under this Agreement are to be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Code Section 409A. Termination of employment under this Agreement, to the extent required by Code Section 409A, will be construed to mean a “separation from service” under Code Section 409A where it is anticipated that no further services will be performed after such date or that the level of services Executive would perform after that date (whether as an employee or independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of services Executive performed over the prior thirty-six (36) month period. The terms of this Agreement are intended to, and will be

16

construed and administered to the fullest extent possible, to permit compensation to be paid under this Agreement to be exempt from or comply with Code Section 409A. Regardless, the Company will not be liable to Executive or anyone else if the Internal Revenue Service or any court or other authority determines that any payments or benefits to be provided under this Agreement are subject to taxes, penalties or interest as a result of failing to comply with or be exempt from Code Section 409A.

Notwithstanding anything in this Agreement to the contrary, if any payment or benefit that constitutes non-exempt “deferred compensation” under Code Section 409A would otherwise be provided under this Agreement due to Executive’s separation from service during a period in which he is a “specified employee” (as defined in Code Section 409A and the associated final regulations), then, to the extent required by Code Section 409A, such payments or benefits will be delayed, to the extent applicable, until six months after Executive’s separation from service or, if earlier, Executive’s death (the “409A Deferral Period”). If such payments are otherwise due to be made in installments during the 409A Deferral Period, the payments that would otherwise have been made in the 409A Deferral Period will be accumulated and paid in a lump sum as soon as the 409A Deferral Period ends, and the balance of the payments will be made as otherwise scheduled. In the event benefits are required to be deferred, any such benefit may be provided during the 409A Deferral Period at Executive’s expense, with Executive having the right to reimbursement from the Company once the 409A Deferral Period ends, and the balance of the benefits will be provided as otherwise scheduled.

14. Arbitration. Any claim or dispute arising under this Agreement will be subject to arbitration, and before commencing any court action, the Parties agree that they will arbitrate all controversies and such arbitration will occur in Greenville, South Carolina according to the Employment Dispute Rules of the American Arbitration Association and the Federal Arbitration Act, 9 U.S.C. §1, et seq. The arbitrators will be authorized to award both liquidated and actual damages as well as injunctive relief, but no punitive damages. The arbitrator’s award will be binding and conclusive upon the Parties, subject to 9 U.S.C. §10. Each party has the right to have the award made the judgment of a court of competent jurisdiction.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the dates indicated below.

EXECUTIVE:		SCANSOURCE, INC.:
Name:	/s/ Richard P. Cleys	By:	/s/ Michael L. Baur
Date:	5/28/08	Name:	Michael L. Baur
		Title:	CEO
		Date:	5/23/08

17

EXHIBIT A TO EMPLOYMENT AGREEMENT

Executive: Richard P. Cleys

Base Salary: $265,000 annually

Variable Compensation: Variable compensation may be paid in such amounts as may be determined by the Board Compensation Committee, with the input of the CEO, based upon Executive’s performance and attainment of management and financial performance goals. The target amount of such variable compensation will be $25,000 per quarter and the maximum amount of such variable compensation will be $37,500 per quarter.

Any variable compensation earned during the Company’s 2009 fiscal year will be paid quarterly and any variable compensation earned during the Company’s 2010 and 2011 fiscal years will be paid at such times as agreed to by the Company. Further, notwithstanding any other provision of this Agreement or this Exhibit A, in no event will any variable compensation to be paid under this Agreement be paid to Executive after the later of (i) March 15^th following the end of the calendar year in which Executive right to such variable compensation vests or (ii) the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to such variable compensation vests.

Given Executive may be a “covered employee” under Code Section 162(m), the foregoing variable compensation is intended to be a Performance Unit granted under the terms of the Company’s 2002 Long-Term Incentive Plan and has been designated as a “Qualified Performance-Based Award.” The variable compensation is intended to qualify for the Code Section 162(m) Exemption within the meaning of the Company’s 2002 Long-Term Incentive Plan. In no event may Executive’s variable compensation under this Agreement for any year exceed the maximum amount allowed by the terms of the 2002 Long-Term Incentive Plan currently in effect, which is $3,000,000 as of the Effective Date. Executive’s right to receive and retain any payment of variable compensation is subject to the written certification of the Board Compensation Committee that the relevant performance goals have been achieved. To the extent appropriate, the Board Compensation Committee may provide for the payment of variable compensation under the terms of another Company variable plan that permits Qualified Performance-Based Awards, in which case the limits and terms of such other variable plan will apply.

Days of Paid Vacation per Fiscal Year:	Approving Person:
15	Chief Executive Officer

Executive Notice Address:
Richard P. Cleys
2 Peters Creek Court
Simpsonville, SC 29681
	Initials:            /s/ RPC            /            /s/ MLB

18

EXHIBIT B TO EMPLOYMENT AGREEMENT

Form of Release

THIS RELEASE (“Release”) is granted effective as of the      day of             ,          by                      (“Executive”) in favor of ScanSource, Inc. (the “Company”). This is the Release referred to that certain Employment Agreement dated as of             ,          by and between the Company and Executive (the “Employment Agreement’). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for himself, his successors, assigns, executors, administrators, insureds, attorneys, and all those entitled to assert his rights, now and forever hereby releases and discharges the Company and its respective officers, directors, shareholders, stockholders, trustees, partners, joint ventures, board members, employees, agents, parent corporations, divisions, wholly or partially owned subsidiaries, affiliates, estates, predecessors, successors, heirs, executors, administrators, assigns, representatives, and attorneys (the “Released Parties”), from any and all legal, administrative, and equitable claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorneys’ fees and costs, or liabilities of any nature whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal, state or local statutes, except as provided in Paragraph 2. without limiting the broadness of the foregoing language, Executive agrees to release Company from any and all claims under:

(1) local, state or federal common law, statute, regulation, ordinance or treaty;

(2) Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000(e), et seq.

(3) 42 U.S.C. §§ 1981, l981A, 1983 and 1985;

(4) the Americans with Disabilities Act, 42 U.S.C. § 12101, et seq.;

(5) the Federal Rehabilitation Act of 1973;

(6) the Older Worker Benefit Protection Act, 29 U.S.C. §§ 621, et seq.;

(7) the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601, et seq.;

(8) Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 301, et seq.;

(9) the Health Insurance Portability Act;

(10) the Occupational and Safety Health Act;

(11) the Equal Pay Act,

(12) the Worker Adjustment and Retraining Notification Act;

19

(13) the Saxbanes-Oxley Corporate Reform Act of 2002, 15 U.S.C. 7201. et seq.;

(14) Executive Orders 11246 and 11141;

(15) South Carolina Human Affairs Law;

(16) the South Carolina Payment of Wages Act;

(17) the South Carolina Bill of Rights for Handicapped Persons;

(18) the state workers’ compensation law, including S.C. Code Ann. § 41-1-80;

(19) tort claims including, but not limited to, claims of wrongful termination, constructive discharge, defamation, invasion of privacy, interference with contract, interference with prospective economic advantage and intentional or negligent infliction of emotional distress and outrage;

(20) contract claims, whether express or implied;

(21) claims for unpaid wages, benefits or entitlements asserted under the Fair Labor Standards Act, 29 U.S.C. § 201, et seq., or under South Carolina wages and hours laws, including, but not limited to, the South Carolina Payment of Wages Act;

(22) claims for unpaid benefits or entitlements asserted under any Company plan, policy, benefits offering or program except as otherwise required by law;

(23) claims for attorneys’ fees, interest, expenses and costs, injunctive relief or reinstatement to which he is, claims to be or may be entitled; and

(24) the Age Discrimination in Employment Act, 29 U.S.C. §§ 621, et seq.;

each as amended, and all other such similar statutes, city or county ordinances or resolutions and laws of the State of South Carolina, provided, however, that nothing herein shall release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, South Carolina law, or otherwise.

Without waiving any prospective or retrospective rights under the Family and Medical Leave Act (“FMLA”) or the Fair Labor Standards Act (“FLSA”), Executive admits that he has received from the Company all rights and benefits, if any, potentially due to him pursuant to the FMLA or FLSA. It is the parties’ intent in release all claims, which can legally be released, but no more than that.

Executive specifically agrees not to attempt to institute any proceedings or pursue any action pursuant to any laws (state, local, or federal) with any agency or in any jurisdiction (state, local, or federal) based on employment with or termination from the Company except as required or protected by law. Executive covenants that he will in not way encourage or assist any person or entity (including, but not limited to, any past, present or future employee(s) of Company) to take part or participate in any legal or administrative action against Company, except as otherwise required or protected by law. Nothing in the Agreement shall be interpreted or applied in a manner that affects or limits Executive’s otherwise lawful ability to bring an administrative charge with the Equal Employment Opportunity Commission or other appropriate state or local comparable administrative agency; however, the parties agree that Executive has released Company from all liability arising from the laws, statutes, and common law listed in paragraph 1 (except as set forth in this paragraph below, with respect to the Age Discrimination in Employment Act (“ADEA”)) and, as such, Executive is not and will not be entitled to any

20

monetary or other comparable relief on his own behalf. Nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s ability to challenge (with a lawsuit or administrative charge) the validity of Executive’s release of Company in this Agreement for age claims under the ADEA (which release is provided for in paragraph 2 of this Agreement). Other than a challenge to the validity of the release of ADEA claims under this Agreement, Executive has released Company from all liability with respect to the laws, statutes, and common law listed in paragraph 2, including the ADEA.

2. Release of Claims Under Age Discrimination In Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, he has released and waived any and all claims he has or may have as of the date of this Release for age discrimination under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that he in fact has consulted a knowledgeable, competent attorney regarding this Release; that he may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration he receives for this Release is in addition to amounts to which he was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

3. Executive acknowledges and represents that as an employee of the Company he has been obligated to, and has been given the full and unfettered opportunity to, report timely to the Company any conduct that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way, even if such conduct is not, or does not appear to be, a violation of any law. Executive acknowledges that a condition of the payment of any consideration provided by the Company to the Executive hereunder is his truthful and complete representation to the Company regarding any such conduct, including but not limited to conduct regarding compliance with the Company’s Code of Ethics, polices, and procedures, and with all laws and standards governing the Company’s business.

Executive’s truthful and complete representation, based on his thorough search of his knowledge and memory is as follows: Executive has not been directly or indirectly involved in any such conduct; no one has asked or directed him to participate in any such conduct; and Executive has no specific knowledge of any conduct by any other person(s) that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way.

Executive agrees that he has carefully read this Release and is signing it voluntarily. Executive acknowledges that he has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving his right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by him, and must deliver written notice of revocation in

21

person to                      at the following address:                                         , and such revocation shall not be effective unless actually received by             , within seven (7) days following the date the release was signed by Executive. If Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to him under the Employment Agreement and he shall return to the Company any such payment received prior to that date.

EXECUTIVE HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AND ANY AND ALL OTHER STATE AND FEDERAL LAWS, WHETHER STATUTORY OR COMMON LAW. EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS CHOOSING CONCERNING HIS EXECUTION OF THIS RELEASE AND THAT HE IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS.

Executive

Date:

22

EXHIBIT C to EMPLOYMENT AGREEMENT

Definition of Change in Control:

For the purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events:

(i) individuals who, on the Effective Date, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any “person” (such term for purposes of this definition being as defined in Section 3(a)(9) of the Exchange Act and as used in Section l3(d)(3) and 14(d)(2) of the Exchange Act) other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed and an Incumbent Directors, or

(ii) any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a Subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”) or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such

23

Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any Subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

24

EX-10.19

Exhibit 10.19

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) between ScanSource, Inc., a South Carolina corporation (“Company”), and Michael L. Baur (“Executive”) (collectively “the Parties”) is effective as of June 30, 2008 (“Effective Date”) as an amendment and restatement of the Employment Agreement originally dated as of October 13, 2005, between the Company and Executive.

BACKGROUND

The Company desires to employ Executive as Chief Executive Officer, and Executive is willing to serve in such capacity, in accordance with the terms and conditions of this Agreement.

In consideration of the foregoing and of the mutual commitments below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Employment. On the Effective Date, Executive will be employed in the capacity stated above with such commensurate responsibilities as are assigned to him by the Board of Directors of the Company (“Board”).

2. Employment Period. Unless earlier terminated in accordance with Section 5, Executive’s employment will be for a term (the “Employment Period”), beginning on the Effective Date and ending three years after the Effective Date, the Employment Period End Date. Provided, however, that if a Change in Control, as defined in Exhibit C hereto, occurs during the Employment Period, the ending date of the Employment Period will be extended so that it expires on the later of the Employment Period End Date or the first anniversary of the date on which the Change in Control initially occurred.

3. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote his business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder. Provided, however, that it shall not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and/or (ii) manage personal business interests and investments, so long as these activities do not interfere with the performance of Executive’s responsibilities under this Agreement.

4. Compensation and Benefits.

(a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary at the rate specified on Exhibit A (“Base Salary”), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The Compensation Committee of the Board will review Executive’s Base Salary annually and in their sole discretion

may increase (but not decrease) Executive’s Base Salary from year to year. The target amounts of such increases, if any, will be between 5% to 10% of Executive’s then-current Base Salary. This annual review of Executive’s Base Salary will consider, among other things, Executive’s performance and the Company’s performance. If Executive becomes eligible during the Employment Period to receive benefits under the Company’s short-term disability policy, the Company will continue to pay Executive’s Base Salary; provided, however, that Executive’s Base Salary during such period will be reduced by any amounts Executive receives under the short-term disability policy.

(b) Incentive Compensation, Savings and Retirement Plans. During the Employment Period, Executive will be entitled to participate in all deferred compensation, savings and retirement plans, practices, policies and programs applicable to staff officers of the Company (“Peer Executives”) pursuant to their terms. The Executive will also be eligible to receive certain incentive compensation (“Incentive Compensation”) based on financial and/or performance criteria established periodically by the Board Compensation Committee, as specified on Exhibit A.

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s eligible dependents may participate pursuant to their terms in the welfare benefit plans, practices, policies and programs provided by the Company which may include, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent applicable to Peer Executives. Contributions will be required by the Executive. The Company may, in its sole discretion, modify, change, or eliminate its Welfare Plans.

(d) Expenses. During the Employment Period, Executive will be entitled to receive reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company to the extent applicable to Peer Executives, and such reimbursements will be made no later than the last day of the year immediately following the year in which Executive incurs the reimbursable expense.

(e) Fringe Benefits. During the Employment Period, Executive will be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company in effect for Peer Executives. In lieu of reimbursing Executive for expenditures on perquisites and similar items, the Company will also pay to Executive Fifty Thousand Dollars ($50,000), less normal withholdings, in a single lump sum each July during the Employment Period. Executive will not be required to account for any such expenditures or return any of the payments to the extent Executive’s expenditures are less than such amount, and Executive will not have any right to be reimbursed for any perquisites or other such items.

(f) Vacation. During each fiscal year during the Employment Period, Executive will be entitled to the number of days of paid vacation specified on Exhibit A. Executive may take vacation at the times Executive reasonably requests, subject to the prior approval of the person specified on Exhibit A. Unused vacation time will not carry over to the next fiscal year and will not be paid upon termination of employment.

2

5. Termination of Employment.

(a) Death, Retirement or Disability. Executive’s employment terminates automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement, “Retirement” means normal retirement as defined in the Company’s retirement plan in effect when Executive retires, or if there is no retirement plan, “Retirement” will mean the Executive’s voluntary termination of employment after age 55 with fifteen years of service. If the Company determines that the Executive has become disabled during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive’s employment. Executive’s employment with the Company will terminate effective on the 30th day after receipt of such written notice by Executive (“Disability Effective Date”), unless, within the 30 days after such receipt, Executive has returned to full-time performance of Executive’s duties. For purposes of this Agreement, “Disability” means (i) Executive is unable to engage in any substantial gainful activity due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for at least twelve (12) months or (ii) Executive is, due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for at least twelve (12) months, receiving income replacement benefits for at least three (3) months under an accident and health plan covering employees of Executive’s employer. Executive will also be deemed disabled under this Agreement if he is determined to be totally disabled by the United States Social Security Administration. Executive will also be deemed disabled under this Agreement if determined to be disabled under the Company’s long-term disability plan, if any, provided the definition of disability under such plan complies with the foregoing definition of disability. At the request of Executive or his personal representative, the Board’s determination that the Disability of Executive has occurred will be certified by two physicians mutually agreed upon by Executive, or his personal representative, and the Company. If the two physicians are unwilling to certify that the Executive is disabled, Executive’s termination will be deemed a termination by the Company without Cause and not a termination because of his Disability.

(b) Termination by the Company. The Company may terminate Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” shall mean:

(i) the failure of Executive to satisfactorily perform Executive’s duties with the Company (other than failure resulting from incapacity due to Disability), after a written demand for satisfactory performance is delivered to Executive by the Board, which specifically identifies the manner in which the Board believes that Executive has not satisfactorily performed Executive’s duties. The decision of whether Executive has satisfactorily performed his duties with the Company or complied with the demand for satisfactory performance is in the sole discretion of the Board;

3

(ii) Engaging in unethical or illegal conduct or misconduct which includes but is not limited to violations of the Company’s policies concerning employee conduct; or

(iii) The Executive’s breach of any term of this Agreement.

(c) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” means:

(i) without the consent of Executive, the assignment to Executive of any duties materially inconsistent for a chief executive officer, excluding an isolated, insubstantial, and inadvertent action taken in good faith which is remedied by the Company promptly after receipt of notice from Executive;

(ii) a material reduction by the Company in Executive’s Base Salary or a material reduction in Executive’s Incentive Compensation opportunity;

(iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive’s total base compensation, unless the Company provides a substantially equivalent alternative plan, or (b) to continue Executive’s participation in the alternative plan on a basis that is substantially equivalent in terms of the value of benefits provided;

(iv) the Company’s requiring Executive, without his consent, to be based at any location that increases Executive’s normal work commute by fifty (50) miles or more as compared to Executive’s normal work commute or otherwise is a material change in the location at which Executive is based;

(v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement;

(vi) the material breach of this Agreement by the Company; or

(vii) if no new employment agreement has been entered into by Executive and the Company or its successor after or in contemplation of a Change in Control, termination by Executive for any reason or no reason during the 60-day period beginning on the sixth-month anniversary of a Change in Control.

Executive must provide written notice to the Company of Executive’s intent to terminate employment for Good Reason within 30 days of the initial existence of the Good Reason. The Company will have an opportunity to cure any claimed event of Good Reason within 30 days of notice from Executive. The Board’s good faith determination of cure will be binding. The Company will notify Executive in writing of the timely cure of any claimed event of Good Reason and how the cure was made. Any Notice of Termination delivered

4

by Executive based on a claimed Good Reason which was thereafter cured by the Company will be deemed withdrawn and ineffective to terminate this Agreement. If the Company fails to cure any claimed event of Good Reason within 30 days of notice from Executive, Executive must terminate employment for such claim of Good Reason within 180 days of the initial existence of the Good Reason, and if Executive fails to do so, such claimed event of Good Reason will be deemed withdrawn and ineffective to terminate this Agreement.

(d) Notice of Termination. Any termination of Executive’s employment by the Company or by Executive must be communicated by Notice of Termination to the other Party in accordance with Section 14(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) states the specific termination provision in this Agreement relied upon, including whether such termination is for Cause or Good Reason, (ii) if such termination is for Cause or Good Reason, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provisions so indicated, and (iii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause will not waive any right of Executive or the Company, or preclude Executive or the Company from asserting applicable facts or circumstances in enforcing rights under this Agreement.

(e) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination or, if Executive’s employment is terminated by reason of death, Retirement or Disability, the date of death or Retirement or the Disability Effective Date.

6. Obligations of the Company upon Termination.

(a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause, Death, Disability, Retirement, or Normal Expiration of Employment Period. If, during the Employment Period: (i) the Company terminates Executive’s employment other than for Cause, death, Disability, or Retirement, or (ii) Executive terminates employment for Good Reason following the Company’s failure to cure such Good Reason as set forth in Section 5(c) of this Agreement, the Company will pay Executive the following amounts and provide the following benefits:

(i) the sum of Executive’s Base Salary earned through the Date of Termination to the extent not already paid (such amount is hereinafter referred to as the “Accrued Obligations”) will be paid as soon as practicable after the Date of Termination per the Company’s customary payroll practices; and

5

(ii) to the extent not previously paid or provided and only if earned as of the Date of Termination, the Company will timely pay or provide to Executive any other amounts or benefits which Executive is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company (“Other Benefits”) pursuant to the terms of such Other Benefits; and

(iii) subject to Section 14(i) of this Agreement and Executive’s execution of a Release in substantially the form of Exhibit B hereto (the “Release”) within the time set forth in Section 6(g) of this Agreement, on the 30^th day after the Date of Termination, the Company will pay to Executive in a lump sum in cash the amount in (A), pay the amount in (B) as set forth below, and provide the benefits in (C):

(A) the amount equal to the greater of (a) two or (b) the number of full months remaining between the Date of Termination and the Employment Period End Date, divided by 12, times the highest combined annual Base Salary and Incentive Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination (the “Severance Benefits”), less normal withholdings. Notwithstanding the foregoing, if the Date of Termination occurs within 12 months after or otherwise in contemplation of a Change in Control, as defined in Exhibit C, Executive will receive Severance Benefits in an amount equal to three times the highest combined annual Base Salary and Incentive Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination, less normal withholdings. Executive’s entitlement to receive and retain the amounts set forth in this Section 6 are conditioned on Executive’s compliance with the Restrictions on Conduct described in Section 11;

(B) a bonus equal to the pro rata portion (based on the number of days elapsed in the current fiscal year through the Date of Termination) of the current fiscal year annual incentive compensation, if any, that would otherwise be payable if the Executive had continued employment through the end of the current fiscal year, based on actual performance (the “Pro Rata Bonus”). The Pro Rata Bonus, less normal withholdings will be paid at the normal time for payment of annual bonuses as if Executive had continued employment through the time of payment of the bonus, which will be no later than the later of March 15 following the end of the calendar year in which Executive’s right to the bonus vests or the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to the bonus vests.

(C) for the period of time following the Date of Termination indicated on Exhibit A (the “Health Benefits Continuation Period”), the Company will provide to Executive and/or Executive’s eligible dependents on a monthly basis continued coverage under its group health benefit plans to which Executive and/or Executive’s eligible dependents

6

would otherwise be entitled to continue under COBRA; provided, however, that such Health Benefits Continuation Period will run concurrently with any period during which Executive is eligible to elect health coverage under COBRA, and for all months after the initial 18 months of the Health Benefits Continuation Period, the applicable Company-subsidized monthly COBRA premium for such group health benefits, determined in accordance with Code Section 4980B and its regulations, will be treated as taxable compensation to Executive by including such amount in Executive’s or Executive’s designee’s income for each month such coverage is provided. No cash payments or other reimbursements will be made in lieu of such continuation coverage during the Health Benefits Continuation Period.

(b) Death. If Executive’s employment is terminated because of Executive’s death during the Employment Period, this Agreement will terminate without further obligations to Executive’s legal representatives under this Agreement, other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), (iii) the provision of Post-Termination Medical Benefits to Executive’s surviving spouse until the end of the month during which Executive would have reached age 65, and to each of Executive’s children who remain a tax dependent of Executive’s surviving spouse until the earlier of such child’s attaining age 21, the child ceasing to be a tax dependent of the surviving spouse, or the child becoming eligible to receive medical benefits under another employer provided plan, as described in Section 6(a)(iii)(C), and (iv) the timely payment or provision of Other Benefits as described in Section 6(a)(ii). The Accrued Obligations and the Pro Rata Bonus will be paid to Executive’s estate or beneficiary, as applicable. Other Benefits as used in this Section 6(b) will include, without limitation, and Executive’s estate and/or beneficiaries will be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as are applicable to Executive on the date of his death pursuant to the terms of such Other Benefits.

(c) Disability. If Executive’s employment is terminated because of Executive’s Disability during the Employment Period, this Agreement will terminate without further obligations to Executive, other than for (i) payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), (iii) provision of Post-Termination Medical Benefits as described in Section 6(a)(iii)(C), (iv) the timely payment or provision of Other Benefits as described in Section 6(a)(ii), and (v) the payment for the period, if any, following such termination during which Executive continues to receive benefits under the Company’s short-term disability policy, of Executive’s Base Salary payable in equal monthly or more frequent installments per the Company’s payroll procedures from time to time; provided, however, that Executive’s Base Salary during such period will be reduced by any amounts Executive receives under the Company’s short-term disability policy. In addition, if Executive’s employment is terminated by reason of Executive’s Disability during the Employment Period, Executive will receive an annual payment of $60,000, less normal withholdings, until Executive is no longer considered to be Disabled or until

7

Executive attains age 65, whichever is earlier, with the first annual installment payable on the 30^th day after the Date of Termination due to Executive’s Disability and each subsequent installment due on the annual anniversary of the Date of Termination provided that Executive is still considered to be Disabled or has not attained age 65, whichever is earlier, by the time scheduled for such payment. Such benefit may be funded, at the election of the Company, through an underwritten individual long-term disability policy for the benefit of Executive or by the Company directly. The term Other Benefits as used in this Section 6(c) includes, without limitation, and Executive will be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as are applicable to Executive and his family on the Date of Termination pursuant to the terms of such Other Benefits.

(d) Retirement. If Executive’s employment is terminated because of Executive’s Retirement during the Employment Period, this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), (iii) the continuation of Post-Termination Medical Benefits as described in Section 6(a)(iii)(C), and (iv) the timely payment or provision of Other Benefits as described in Section 6(a)(ii). Accrued Obligations will be paid to Executive in a lump sum in cash within 30 days of the Date of Termination unless a longer period is required for calculation as set forth in Section 6(a)(iii). The term Other Benefits as used in this Section 6(d) includes, without limitation, and Executive shall be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination pursuant to the terms of such Other Benefits.

(e) Cause or Voluntary Termination without Good Reason. If Executive’s employment is terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), and (ii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii).

(f) Normal Expiration of Employment Period. If Executive’s employment is terminated due to the normal expiration of the Employment Period or is terminated within 60 days after the Employment Period End Date (for reasons other than Cause, death, Disability or Retirement), this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), (iii) the payment of the Severance Benefits (subject to the Executive’s execution of the Release) as described in Section 6(a)(iii)(A), the provision of Post-Termination Medical Benefits as described in Section 6(a)(iii)(B), and (v) the timely payment or provision of Other Benefits as described in Section 6(a)(ii). Notwithstanding anything to the contrary in this Agreement, if the Company provides notice that the Agreement will not be renewed and a new employment agreement is not

8

offered and the Executive remains an employee of the Company in any capacity, Executive’s employment will not be governed by this Agreement and Executive will be an at-will employee. In that instance, Executive remains subject to the Restrictions on Conduct described in Section 11.

(g) Execution of Release. Notwithstanding anything to the contrary in this Section 6, the Release must be executed and provided to the Company, and the period for revoking same must have expired, before the 30^th day following the Date of Termination.

7. Non-exclusivity of Rights. Nothing in this Agreement prevents or limits Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company and for which Executive may qualify, nor, subject to Section 14(d), will anything herein limit or otherwise affect any rights Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice, program, contract or agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement.

8. Mandatory Reduction of Payments in Certain Events. Any payments made to Executive under this Agreement will be made with the Executive’s best interests in mind related to Code Section 4999.

(a) Anything in this Agreement to the contrary notwithstanding, if it is determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a “Payment”) would be subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”), then, before making the Payment to Executive, a calculation will be made comparing (i) the net benefit to Executive of all Payments after payment of the Excise Tax, to (ii) the net benefit to Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments will be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”). In that event, Executive will direct which Payments are to be reduced and any such reduction will be made so as not to violate Code Section 409A.

(b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to in Section 8(a)(i) and (ii) above will be made by the Company’s regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the “Accounting Firm”) which will provide detailed supporting calculations. Any determination by the Accounting Firm will be binding upon the Company and Executive. As a result of the uncertainty in the application of Code Section 4999 at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments to which Executive was entitled, but did not receive pursuant to Section 8(a), could have been

9

made without the imposition of the Excise Tax (“Underpayment”). In such event, the Accounting Firm will determine the amount of the Underpayment that has occurred and any such Underpayment will be promptly paid by the Company to or for the benefit of Executive.

(c) If the provisions of Code Section 280G and 4999 or any successor provisions are repealed without succession, this Section 8 will be of no further force or effect.

9. Costs of Enforcement. Subject to Section 8(b), each Party will pay its own costs and expenses incurred in enforcing or establishing its rights under this Agreement, including, without limitation, attorneys’ fees, whether a suit is brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings.

10. Representations and Warranties. Executive represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any restrictive covenant not to compete, not to solicit or not to disclose or use confidential information, with any person or entity, and Executive’s execution of this Agreement and performance of his obligations will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

11. Restrictions on Conduct of Executive.

(a) General. Executive agrees that as part of the services he will perform for the Company he will be exposed to, and help create and maintain, competitive advantages over other “Competitive Businesses,” as well as good will with the Company’s customers and suppliers. By virtue of the position Executive will hold, Executive is receiving, will receive, or will be provided access to the Company’s: (1) customers, suppliers, advertisers, and vendors as well as pricing information, distribution channels, and other terms of those relationships; (2) “Confidential Information” and “Trade Secrets;” (3) the relationships and other elements that together comprise good will; and/or (4) institutional knowledge regarding product development, its engineering, product specification, material suppliers, material specifications, product suppliers, manufacturing knowledge, customer feedback, surveys, design-around information, research and development information, internal quality control tests, other quality control information, and other similar information. Executive agrees that the competitive advantage and good will the Company has created, and which Executive will assist in furthering and maintaining, is an important and legitimate business asset of the Company. Should Executive compete against the Company, having intimate knowledge of the information that gives the Company its competitive advantage and good will would give Executive, or those “Competitive Businesses” he is assisting, an unfair advantage over the Company.

(b) Definitions. The following capitalized terms used in this Section 11 will have the meanings assigned to them below, which definitions will apply to both the singular and the plural forms of these terms:

10

“Competitive Business” – means any entity that manufactures, markets, sells, or distributes (or is planning to do any of the foregoing) any goods or services in or to the point of sale, automatic identification, data capture, security, business telephony, communication products and peripherals markets if such entity manufactures, markets, sells, or distributes (or is attempting to do any of the foregoing) any product that is the same or similar to any good or service offered by the Company, including reasonable alternatives, within the final two (2) years of Executive’s employment with the Company. Competitive Business also includes any supplier to any manufacturer of a product that is the same as, or similar to, or considered a reasonable alternative to a Company product that was manufactured, sold, offered or distributed by the Company within the final two (2) years of Executive’s employment with the Company. Executive agrees that Competitive Businesses include, but are not limited to, the following entities: Ingram Micro, Tech Data, Avnet, BlueStar, Westcon, Voda One, Arrow, Agilysis, Azerty, PC POS, Jarltech, Jenne, Securematics, Synnex, Alliance (NEI), NETXUSA, ADI, Tri-Ed, Northern Video, and Anixter.

“Confidential Information” means any and all information of the Company that has value and is not generally known to the Company’s competitors. This includes, but is not limited to, any information or documents about: the Company’s accounting practices; financial data; financial plans and practices; the Company’s operations; its future plans (including new products, improved products, and products under development); its methods of doing business; internal forms, checklists, or quality assurance testing; programs; customer and supplier lists or other such related information as pricing or terms of business dealings; supply chains; shipping chains and prices; packaging technology or pricing; sourcing information for components, materials, supplies, and other goods; employees; pay scales; bonus structures; contractor information and lists; marketing strategies and information; product plans; distribution plans and distribution channel relationships; business plans; manufacturing, operation, sales and distribution processes; costs; margins for products; prices, sales, orders and quotes for the Company’s business that is not readily attainable by the general public; existing and future services; testing information (including methods and results) related to materials used in the development of the Company’s products or materials that could be used with the Company’s products; development information (including methods and results) related to computer programs that design or test products or that track information from a central database; and the computer or electronic passwords of all employees and/or firewalls of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive, is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information other

11

than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

“Prohibited Duties” means supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for a Competitive Business that is similar or related to one or more duties Executive performed or supervised for the Company. Prohibited duties include owning greater than 10% of any Competitive Business. Prohibited duties includes supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for any material, product or service provider of any Competitive Business, if Executive’s work for such material, product or service provider is associated with a Competitive Business.

“Restricted Territory” means any place where the Company or its affiliates is (or is attempting to) actively manufacturing, marketing, selling, or distributing its products within the final two (2) years of Executive’s employment, or places where the Company made affirmative steps to market or sell its products within the final six (6) months of Executive’s employment. If Executive was assigned only a portion of the territory in which the Company operates or sells, then the Restricted Territory shall be narrowly construed to include only the limited territory of the Executive.

“Trade Secrets” means information related to the business or services of the Company which (1) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reasonable reverse engineering processes by persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts by the Company and affiliated third parties that are reasonable under the circumstances to maintain its secrecy. Assuming the foregoing criteria in clauses (1) and (2) are met, Trade Secret encompasses business and technical information including, without limitation, know-how, designs, formulas, patterns, compilations, programs, devices, inventions, methods, techniques, drawings processes, finances, actual or potential customers and suppliers, and existing and future products and services of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive, is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information through some avenue other than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can

12

show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

(c) Restrictions. Executive understands and agrees that the compensation the Company has agreed to provide pursuant to this Agreement would not be as lucrative if the restrictions set forth in this section were not included in this Agreement. Therefore, in consideration of the compensation provided in this Agreement, and the other terms agreed to by the Company, along with the disclosure (and continued disclosure of Confidential Information and Trade Secrets) a portion of which is being paid to compensate Executive for these covenants, Executive covenants and agrees as follows:

(i) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not engage in any Prohibited Duties for a Competitive Business in the Restricted Territory;

(ii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s customers or suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s prospective customers or prospective suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iv) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Termination Date, Executive agrees he will not solicit any of the Company’s employees whom Executive supervised during the course of his employment with the Company, any employees with whom he had contact during his employment, any employees who had contacts of employment with the Company at the time solicited, or any employees who had restrictive covenants at the time solicited, to leave the Company for any purpose;

(v) for the term of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, publish, disseminate, provide, or otherwise disclose any Confidential Information or Trade Secrets to any third party, unless required to do so by legal process or other law, without the Company’s prior written consent. Executive agrees that if he believes he is compelled to reveal Confidential Information or Trade Secrets pursuant to the limited exception provided herein, Executive will

13

provide the Company at least 7 days advance notice before doing so, and will explain the specifics under which such Confidential Information or Trade Secrets are to be disclosed.

(vi) For the term of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, for his own behalf or otherwise, use in any manner the Company’s Confidential Information or Trade Secrets.

(d) Non-Disparagement. The Company and Executive agree that for the term of Employee’s employment, and for a period of five (5) years thereafter, they will not disparage each other to any non-governmental third parties. Nothing in this subsection should be interpreted as any restriction on either Party’s compliance with any laws requiring or compelling disclosure, or any disclosures that are considered absolutely privileged, such as legal proceedings.

(e) Blue Pencil. The Company and Executive agree that the provisions of Section 11, including all subparts, are intended to strike the balance between Executive earning a livelihood and the Company protecting its important competitive advantages and good will. The Parties have drafted the provisions of Section 11, including all subparts, to allow for enforcement. The Parties agree that should a court determine that any word, phrase, clause, sentence, or paragraph is unreasonably broad in time, territory, or scope so as to render any remaining provisions unenforceable, the Parties desire the court to strike the offending language in the narrowest way possible and enforce the remainder as if the offending language was not there, so that only reasonable restrictions are enforced.

(f) Elective Right of the Company. If Executive challenges the enforceability of the Restrictive Covenants (or asserts an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are (i) not enforceable as a matter of law, (ii) unreasonable in geographical scope or duration or (iii) void as against public policy, the Company will have the right (1) to cease making the payments required under Section 6 above and, upon demand, to have Executive repay, within 10 business days of any such demand, any payments already made. Any right afforded to, or exercised by, the Company under this Agreement will not affect the enforceability of the Restrictive Covenants or any other right of the Company under this Agreement.

14

12. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company will not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by Executive’s legal representatives.

(b) This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor (whether direct or indirect, by

purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” will mean the Company as herein before defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

13. Arbitration. Any claim or dispute arising under this Agreement will be subject to arbitration, and before commencing any court action, the Parties agree that they will arbitrate all controversies and such arbitration will occur in Greenville, South Carolina according to the Employment Dispute Rules of the American Arbitration Association and the Federal Arbitration Act, 9 U.S.C. §1, et seq. The arbitrators will be authorized to award both liquidated and actual damages as well as injunctive relief, but no punitive damages. The arbitrator’s award will be binding and conclusive upon the Parties, subject to 9 U.S.C. §10. Each party has the right to have the award made the judgment of a court of competent jurisdiction.

14. Miscellaneous.

(a) Waiver. Failure of either Party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement will not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless the waiver is in a writing signed by the Party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which will remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

15

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Parties on the subject matter hereof. From and after the Effective Date, this Agreement will supersede any other agreement between the Parties on the subject matter hereof, including without limitation, any prior Agreement.

(e) Governing Law and Jurisdiction. Without regard to conflict of laws principles, the laws of the State of South Carolina will govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. This Agreement may only be enforced in a court of competent jurisdiction in Greenville County, South Carolina and Executive agrees to submit to the exclusive jurisdiction of a court of competent jurisdiction in Greenville, South Carolina.

(f) Notices. All notices, requests, demands and other communications required or permitted in this Agreement must be in writing and will be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:

To Company:	ScanSource, Inc. 6 Logue Court Greenville, SC 29615 Attn: General Counsel
To Executive:	To the address specified on Exhibit A

Any Party may change the address to which notices, requests, demands and other communications will be delivered or mailed by giving notice thereof to the other Party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both Parties, which makes specific reference to this Agreement.

(h) Construction. Each Party and his or its counsel have been provided the opportunity to review and revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party will not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement will be construed as a whole, and according to its fair meaning, and not strictly for or against either party.

(i) Deferred Compensation Provision. Notwithstanding any other provision of this Agreement, it is intended that any payment or benefit provided under this Agreement that is considered to be “deferred compensation” subject to Code Section 409A will be provided in such manner and at such time, including without limitation in connection with a permissible payment event under Code Section 409A, as is exempt from or complies with the requirements of Code Section 409A. All rights to payments

16

and benefits under this Agreement are to be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Code Section 409A. Termination of employment under this Agreement, to the extent required by Code Section 409A, will be construed to mean a “separation from service” under Code Section 409A where it is anticipated that no further services will be performed after such date or that the level of services Executive would perform after that date (whether as an employee or independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of services Executive performed over the prior thirty-six (36)-month period. The terms of this Agreement are intended to, and will be construed and administered to the fullest extent possible, to permit compensation to be paid under this Agreement to be exempt from or comply with Code Section 409A. Regardless, the Company will not be liable to Executive or anyone else if the Internal Revenue Service or any court or other authority determines that any payments or benefits to be provided under this Agreement are subject to taxes, penalties or interest as a result of failing to comply with or be exempt from Code Section 409A.

Notwithstanding anything in this Agreement to the contrary, if any payment or benefit that constitutes non-exempt “deferred compensation” under Code Section 409A would otherwise be provided under this Agreement due to Executive’s separation from service during a period in which he is a “specified employee” (as defined in Code Section 409A and the associated final regulations), then, to the extent required by Code Section 409A, such payments or benefits will be delayed, to the extent applicable, until six months after Executive’s separation from service or, if earlier, Executive’s death (the “409A Deferral Period”). If such payments are otherwise due to be made in installments during the 409A Deferral Period, the payments that would otherwise have been made in the 409A Deferral Period will be accumulated and paid in a lump sum as soon as the 409A Deferral Period ends, and the balance of the payments will be made as otherwise scheduled. In the event benefits are required to be deferred, any such benefit may be provided during the 409A Deferral Period at Executive’s expense, with Executive having the right to reimbursement from the Company once the 409A Deferral Period ends, and the balance of the benefits will be provided as otherwise scheduled.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the dates indicated below.

EXECTIVE:
Name:	/s/ Michael L. Baur
Date:	5/22/08
SCANSOURCE, INC.:
By:	/s/ James G. Foody
Name:	James G. Foody
Title:	Chairman of the Board
Date:	5/27/08

17

EXHIBIT A TO EMPLOYMENT AGREEMENT

Executive: Michael L. Baur

Base Salary: $750,000 annually

Incentive Compensation: Incentive compensation will be paid with respect to the Company’s Operating Income determined at the end of each fiscal year calculated by using the table below.

For purposes of this Agreement, “Operating Income” means the amount reflected for the line item identified as Operating Income on the Company’s audited consolidated financial statements for each respective fiscal year ending during the term of this Agreement and “Return on Invested Capital” means an amount expressed as a percentage of: the Company’s annual (or annualized) EBITDA (net income plus interest, taxes, depreciation and amortization) divided by average shareholder’s equity and interest bearing debt (defined as the sum of shareholder’s equity at the beginning of the period added to the sum of shareholder’s equity at the end of the period, divided by 2, plus the average daily interest bearing debt for the period). The Company reserves the right to make adjustments to the calculation of Return on Invested Capital to account for any extraordinary or unusual items that did not exist or were not in effect as of the Effective Date and to the extent permitted to qualify for the Code Section 162(m) Exemption (as defined below), including, but not limited to, newly pronounced accounting standards and similar laws and regulations and significant non-recurring events that impact the Company. The Company’s calculation of Operating Income, Return on Invested Capital, and the incentive compensation amount shall be conclusive and binding absent fraud or manifest and material error.

For the initial year of the Employment Period, the incentive compensation will be paid to Executive in quarterly installments with each quarterly installment being equal to seventy percent (70%) of the incentive bonus computed using the Operating Income determined by the financial statement prepared for each quarter during the term of this Agreement. The balance of the incentive compensation will be paid with respect to each fiscal year immediately following the auditor’s approval of the release of the Company’s year-end earnings. The Company has no right of reimbursement in the event the amount advanced in quarterly installments exceeds the incentive bonus as finally computed. Following the initial year of the Employment Period, the incentive compensation will be paid to Executive annually. Such annual incentive compensation payments will be made immediately following the auditor’s approval of the release of the Company’s year-end earnings.

The amount of the incentive compensation will be calculated as follows:

• Bonus of 1.65% of Operating Income if Return on Invested Capital exceeds 30%

• Bonus of 1.55% of Operating Income if Return on Invested Capital is 30% or less and greater than 25%

18

• Bonus of 1.5% of Operating Income if Return on Invested Capital is 25% or less and greater than 20%

• Bonus of 1.4% of Operating Income if Return on Invested Capital is 20% or less and greater than 10%

Notwithstanding any other provision of this Agreement or this Exhibit A, any incentive compensation to be paid under this Agreement will be paid to Executive by the later of (i) March 15^th following the end of the calendar year in which Executive right to such incentive compensation vests or (ii) the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to such incentive compensation vests.

Given Executive may be a “covered employee” under Code Section 162(m), the foregoing incentive compensation is intended to be a Performance Unit granted under the terms of the Company’s 2002 Long-Term Incentive Plan and has been designated as a “Qualified Performance-Based Award.” The incentive compensation is intended to qualify for the Code Section 162(m) Exemption within the meaning of the Company’s 2002 Long-Term Incentive Plan. In no event may Executive’s incentive compensation under this Agreement for any year exceed the maximum amount allowed by the terms of the 2002 Long-Term Incentive Plan currently in effect, which is $3,000,000 as of the Effective Date. Executive’s right to receive and retain any payment of incentive compensation is subject to the written certification of the Board Compensation Committee that the relevant performance goals have been achieved. To the extent appropriate, the Board Compensation Committee may provide for the payment of incentive compensation under the terms of another Company incentive plan that permits Qualified Performance-Based Awards, in which case the limits and terms of such other incentive plan will apply.

19

Days of Paid Vacation per Fiscal Year:	Approving Person:
25	Chairman of the Board of Directors

Period of Time for Post-Termination Medical Benefits:

To age 65, or longer as described below for MediGap coverage.

Extended Coverage under Post-Termination Medical Benefits:

MediGap coverage to the extent available, until Executive reaches age 80, consisting of ongoing coverage under one or more insured policies that cover medical expenses for Executive and his dependents in excess of that covered by Medicare.

Executive Notice Address:

6 Logue Court

Greenville, SC 29615

Attn: Michael L. Baur

Initials: /S/ MLB / /S/ JGF

20

EXHIBIT B TO EMPLOYMENT AGREEMENT

Form of Release

THIS RELEASE (“Release”) is granted effective as of the             day of             ,             , by                              (“Executive”) in favor of ScanSource, Inc. (the “Company”). This is the Release referred to that certain Employment Agreement dated as of             ,             by and between the Company and Executive (the “Employment Agreement”). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for himself, his successors, assigns, executors, administrators, insureds, attorneys, and all those entitled to assert his rights, now and forever hereby releases and discharges the Company and its respective officers, directors, shareholders, stockholders, trustees, partners, joint ventures, board members, employees, agents, parent corporations, divisions, wholly or partially owned subsidiaries, affiliates, estates, predecessors, successors, heirs, executors, administrators, assigns, representatives, and attorneys (the “Released Parties”), from any and all legal, administrative, and equitable claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorneys’ fees and costs, or liabilities of any nature whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal, state or local statutes, except as provided in Paragraph 2. without limiting the broadness of the foregoing language, Executive agrees to release Company from any and all claims under:

(1) local, state or federal common law, statute, regulation, ordinance or treaty;

(2) Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000(e), et seq.

(3) 42 U.S.C. §§ 1981, 1981A, 1983 and 1985;

(4) the Americans with Disabilities Act, 42 U.S.C. § 12101, et seq.;

(5) the Federal Rehabilitation Act of 1973;

(6) the Older Worker Benefit Protection Act, 29 U.S.C. §§ 621, et seq.;

(7) the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601, et seq.;

(8) Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 301, et seq.;

(9) the Health Insurance Portability Act;

(10) the Occupational and Safety Health Act;

(11) the Equal Pay Act;

(12) the Worker Adjustment and Retraining Notification Act;

21

(13) the Sarbanes-Oxley Corporate Reform Act of 2002, 15 U.S.C. 7201, et seq.;

(14) Executive Orders 11246 and 11141;

(15) South Carolina Human Affairs Law;

(16) the South Carolina Payment of Wages Act;

(17) the South Carolina Bill of Rights for Handicapped Persons;

(18) the state workers’ compensation law, including S.C. Code Ann. § 41-1-80;

(19) tort claims including, but not limited to, claims of wrongful termination, constructive discharge, defamation, invasion of privacy, interference with contract, interference with prospective economic advantage and intentional or negligent infliction of emotional distress and outrage;

(20) contract claims, whether express or implied;

(21) claims for unpaid wages, benefits or entitlements asserted under the Fair Labor Standards Act, 29 U.S.C. § 201, et seq., or under South Carolina wages and hours laws, including, but not limited to, the South Carolina Payment of Wages Act;

(22) claims for unpaid benefits or entitlements asserted under any Company plan, policy, benefits offering or program except as otherwise required by law;

(23) claims for attorneys’ fees, interest, expenses and costs, injunctive relief or reinstatement to which he is, claims to be or may be entitled; and

(24) the Age Discrimination in Employment Act, 29 U.S.C. §§ 621, et seq.;

each as amended, and all other such similar statutes, city or county ordinances or resolutions and laws of the State of South Carolina, provided, however, that nothing herein shall release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, South Carolina law, or otherwise.

Without waiving any prospective or retrospective rights under the Family and Medical Leave Act (“FMLA”) or the Fair Labor Standards Act (“FLSA”), Executive admits that he has received from the Company all rights and benefits, if any, potentially due to him pursuant to the FMLA or FLSA. It is the parties’ intent to release all claims, which can legally be released, but no more than that.

Executive specifically agrees not to attempt to institute any proceedings or pursue any action pursuant to any laws (state, local, or federal) with any agency or in any jurisdiction (state, local, or federal) based on employment with or termination from the Company except as required or protected by law. Executive covenants that he will in not way encourage or assist any person or entity (including, but not limited to, any past, present or future employee(s) of Company) to take part or participate in any legal or administrative action against Company, except as otherwise required or protected by law. Nothing in the Agreement shall be interpreted or applied in a manner that affects or limits Executive’s otherwise lawful ability to bring an administrative charge with the Equal Employment Opportunity Commission or other appropriate state or local comparable administrative agency; however, the parties agree that Executive has released Company from all liability arising from the laws, statutes, and common law listed in paragraph 1 (except as set forth in this paragraph below, with respect to the Age Discrimination in Employment Act (“ADEA”)) and, as such, Executive is not and will not be entitled to any

22

monetary or other comparable relief on his own behalf. Nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s ability to challenge (with a lawsuit or administrative charge) the validity of Executive’s release of Company in this Agreement for age claims under the ADEA (which release is provided for in paragraph 2 of this Agreement). Other than a challenge to the validity of the release of ADEA claims under this Agreement, Executive has released Company from all liability with respect to the laws, statutes, and common law listed in paragraph 2, including the ADEA

2. Release of Claims Under Age Discrimination in Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, he has released and waived any and all claims he has or may have as of the date of this Release for age discrimination under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that he in fact has consulted a knowledgeable, competent attorney regarding this Release; that he may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration he receives for this Release is in addition to amounts to which he was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

3. Executive acknowledges and represents that as an employee of the Company he has been obligated to, and has been given the full and unfettered opportunity to, report timely to the Company any conduct that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way, even if such conduct is not, or does not appear to be, a violation of any law. Executive acknowledges that a condition of the payment of any consideration provided by the Company to the Executive hereunder is his truthful and complete representation to the Company regarding any such conduct, including but not limited to conduct regarding compliance with the Company’s Code of Ethics, polices, and procedures, and with all laws and standards governing the Company’s business.

Executive’s truthful and complete representation, based on his thorough search of his knowledge and memory, is as follows: Executive has not been directly or indirectly involved in any such conduct; no one has asked or directed him to participate in any such conduct; and Executive has no specific knowledge of any conduct by any other person(s) that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way.

Executive agrees that he has carefully read this Release and is signing it voluntarily. Executive acknowledges that he has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving his right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by him, and must deliver written notice of revocation in

23

person to             at the following address:                             , and such revocation shall not be effective unless actually received by             , within seven (7) days following the date the release was signed by Executive. If Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to him under the Employment Agreement and he shall return to the Company any such payment received prior to that date.

EXECUTIVE HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AND ANY AND ALL OTHER STATE AND FEDERAL LAWS, WHETHER STATUTORY OR COMMON LAW. EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS CHOOSING CONCERNING HIS EXECUTION OF THIS RELEASE AND THAT HE IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS.

Executive

        Date:

24

EXHIBIT C to EMPLOYMENT AGREEMENT

Definition of Change in Control:

For the purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events:

(i) individuals who, on the Effective Date, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any “person” (such term for purposes of this definition being as defined in Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; or

(ii) any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a Subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such

25

Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any Subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

26

EX-10.31

Exhibit 10.31

PURCHASE AND SALE AGREEMENT

THIS PURCHASE AND SALE AGREEMENT (this “Agreement”) is made by and between the following parties (individually a “Party” and collectively the “Parties”) and will become effective immediately upon the date upon which authorized representatives of both Parties have executed this Agreement (the “Effective Date”):

Purchaser:	KANSAS CITY LIFE INSURANCE COMPANY
	3520 Broadway
	Kansas City, Missouri 64111-2565
	Attention: Gregory M. Galvin
Seller:	4100 QUEST, LLC
	6 Logue Court
	Greenville, SC 29615
	Attn: General Counsel

BACKGROUND

WHEREAS, Seller is the owner of the Property (as hereinafter defined); and

WHEREAS, Seller wishes to sell, and Purchaser wishes to purchase, the Property on the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, for and in consideration of the promises, covenants, representations and warranties hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the Parties hereto, the Parties hereto hereby agree as follows:

1. Definitions. The following terms, wherever used in this Agreement with an initial capital letter or letters, shall have the meanings specified:

“Business Day” means Monday through Friday excluding holidays recognized by the federal government and/or the State of Tennessee.

“Escrow Agent” means the Title Company, acting in the capacity of escrow agent hereunder.

“Existing Environmental Report” means that certain letter (together with the materials referenced therein) entitled “Update of Phase I Environmental Site Assessment of the Building D Site, Memphis Distribution Center, Memphis, Tennessee”, prepared by Environmental Resources Management and addressed jointly to Kurt A. Nelson and the Industrial Development Board of the City of Memphis and County of Shelby, Tennessee, dated December 1, 1999 (a copy of which is attached hereto as Exhibit D).

“Existing Exceptions” means those certain exceptions to title to the Property set forth on Exhibit B attached hereto.

“Governmental Requirements” means all present and future laws, ordinances, orders, rules, regulations or requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof relating to all or any part of the Property or the use thereof.

“Improvements” means, collectively, the building, parking areas and all other improvements of any nature at any time and from time to time hereafter located on the Property.

“Inspections” means inspections and review by Purchaser respecting the Property and the Improvements, which may include, without limitation, the following matters: (a) title and survey, (b) access to a public right of way, (c) environmental, (d) wetlands and jurisdictional waters impacting the Improvements, (e) the physical attributes and condition of the Property and the Improvements, including, without limitation, drainage/floodplain issues, structural components, roof, paving, HVAC and electrical, mechanical, plumbing and fire protection systems, (f) compliance with Governmental Requirements (including, without limitation zoning matters), and (g) utility availability.

“Permitted Title Exceptions” means (a) the standard or printed exclusions in the form of Title Policy, (b) all real estate taxes not yet due and payable as of the Closing Date, (c) the Existing Exceptions, and (d) any other matters not objected to in writing by Purchaser prior to the end of the Inspection Period.

“Property” means that certain real property in Shelby County, Tennessee, as more particularly described on Exhibit A attached hereto and made a part hereof by this reference, together with all improvements constructed thereon, including, without limitation the Improvements and all rights running with such land; provided, however, that Seller shall be entitled to remove from such land prior to Closing any and all property of Seller located thereon as listed on Exhibit C hereto (which, if so removed, shall not constitute part of the Property).

“Seller’s Knowledge” means the actual current knowledge through the Closing Date of personnel of Seller responsible for the management of the Property and the handling of potential or actual environmental liabilities of Seller.

“Title Commitment” shall mean the commitment of the Title Company to issue the Title Policy.

“Title Company” shall mean First American Title Insurance Company.

“Title Policy” shall mean the standard form of ALTA Owner’s Policy of Title Insurance dated the date of Closing issued by the Title Company in the amount of the Purchase Price for the Property, and containing, unless prohibited by applicable statutes or regulations, such endorsements as are reasonably required by Purchaser.

- 2 -

2. Sale. Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller, the Property subject to the terms and conditions of this Agreement (including, without limitation, those set forth in Paragraph 5 below).

3. Purchase Price. The purchase price (“Purchase Price”) to be paid by Purchaser to Seller for the Property at Closing shall be Six Million Three Hundred Thousand Dollars ($6,300,000.00). Within four Business Days after the Effective Date, Purchaser shall deliver to Escrow Agent the amount of $100,000 (the “Earnest Money”). The balance of the Purchase Price shall be paid at Closing in immediately available funds.

4. Closing; Closing Costs; Prorations; Credits.

4.1 The closing or settlement of the sale of the Property (the “Closing”) shall be held on or before the later to occur of (a) 15 days after the end of the Inspection Period or (b) 10 days after Seller vacates the Property (the “Closing Date”). At the written request of either Seller or Purchaser. Closing may be accomplished through an escrow with Escrow Agent in which event Purchaser and Seller shall each execute and deliver to Escrow Agent such written escrow instructions as may be reasonably necessary or desirable to carry out such escrow.

4.2 Purchaser shall pay the cost of (a) any title examination of the Property, the title insurance premium for the Title Policy to be issued to Purchaser, any title endorsements to the Title Policy, and any updating of the Survey (hereinafter defined), (b) any transfer, grantor, documentary stamp or similar tax or assessment applicable to the Property, and (c) applicable recording fees. Seller shall pay (a) any overdue property taxes and the costs (including recording costs) of any cure of title defects required of Seller hereunder, (b) the cost of issuance of the Title Commitment, and (c) the cost of preparing the Deed. Each Party shall pay its own attorney fees and expenses. Any escrow fees of the Title Company shall be shared equally.

4.3 Private assessments affecting the Property and utility charges, if any shall be prorated as of midnight of the day preceding the Closing. The state, county, city or other ad valorem property taxes and assessments assessed against the Property for the year in which the Closing occurs (the “Taxes”) shall be prorated, on an accrual basis, as of midnight of the day preceding the day of Closing. If the proration is not based on the actual tax bill for the applicable year, the proration shall, at the request of either Seller or Purchaser, be adjusted when the actual tax bill is available. If the Property is taxed as a portion of a larger parcel, the Parties agree to pay their pro rata share of the Taxes covering the tax period of the Closing (and any previous periods) for the entire parcel to taxing authorities at the Closing, or, if the tax bill is not available, pay into escrow the estimated amount of said bill for payment by the Escrow Agent directly to the taxing authorities when the tax bill becomes available and shall execute and deliver such documentation before and after the Closing as may be necessary to cause the Property to be assessed as a separate parcel. If any special assessments or other similar governmental assessments or charges on the Property have been billed and are pending prior to Closing, Seller shall pay only those installments as shall become due and payable prior to Closing. If the Parties

- 3 -

make any errors or omissions in the closing prorations or if they subsequently determine any dollar amount prorated to be incorrect, each agrees, upon notice from the other after Closing, to make any adjustment necessary to correct the error, including payment of any amount to the other then determined to be owing. This Paragraph 4.3 shall survive Closing.

5. Inspection.

5.1 Provided Purchaser first gives to Seller evidence reasonably acceptable to Seller of proper insurance coverage, Purchaser and Purchaser’s agents, employees and independent contractors shall have the right and privilege to enter upon the Property for a period of 40 days after the Effective Date (the “Inspection Period”) to undertake the Inspections, all at Purchaser’s sole cost and expense. After conducting any soil boring or other test which affects the physical condition of the Property, Purchaser will return the Property to as nearly as practicable its condition prior to such test. Purchaser hereby covenants and agrees to indemnify and hold harmless Seller from any and all loss, liability, costs, claims, demands, damages, actions, causes of actions, and suits arising out of liens, damages to property (including the Property) or personal injury or death caused by the Purchaser’s entry upon the Property pursuant to its rights under this Agreement.

5.2 Within five days after the Effective Date, Seller shall provide to Purchaser (a) any and all engineering, soils, environmental and property inspection reports in its possession or control, and (b) copies of operating expenses for 2005, 2006, and 2007 and copies of the most recent real estate tax bill and assessment notice with regard to the Property.

5.3 If, on or before the end of the Inspection Period, Purchaser determines that the results of its Inspections demonstrate that the Property is not in a condition acceptable to Purchaser, Purchaser reserves, in its sole discretion, the right to terminate this Agreement by providing written notice to Seller on or before the end of the Inspection Period. If Purchaser properly terminates this Agreement in accordance with this section, the Parties shall have no further rights or obligations hereunder, except for those which explicitly survive such a termination by their terms, and the Earnest Money shall be returned to Purchaser.

5.4 In the event Purchaser cannot obtain approval for the Closing from its Investment Committee and its Executive Committee prior to the end of the Inspection Period, this Agreement shall terminate, along with any obligation of Purchaser to purchase the Property, and the Parties shall have no further rights or obligations hereunder, except for those which explicitly survive such a termination by their terms, and the Earnest Money shall be returned to Purchaser.

5.5 In the event that Purchaser does not terminate this Agreement within the time periods set forth in Paragraphs 5.3 or 5.4 and in accordance with the terms of this Agreement, the Earnest Money shall be earned by Seller and become non-refundable to Purchaser, subject to performance by Seller of its closing obligations.

- 4 -

6. Title/Survey.

6.1 Seller shall not, at any time during the Term, alter or encumber title to the Property or otherwise suffer or permit any further encumbrances or liens to attach to the Property (other than the Permitted Title Exceptions). Seller shall convey marketable and insurable title to the Property to Purchaser by a special warranty deed, which shall be subject only to the Permitted Title Exceptions (the “Deed”). In no event shall the Property be subject to any (i) mortgage, deed to secure debt, deed of trust, security agreement, judgment, lien or claim of lien, or any other title exception or defect that is monetary in nature, Seller hereby agreeing to pay and satisfy of record any such title defects or exceptions prior to or at Closing at Seller’s expense or terminate this Agreement by the deadline for Closing hereunder, or (ii) any leases, rental agreements or other rights of occupancy of any kind, whether written or oral (the items described in (i) and (ii) are referred to herein collectively as the “Seller Defects”). For purposes of this Paragraph 6.1. “insurable title” means title insurable at standard rates by the Title Company with a Title Policy.

6.2 Seller shall obtain, at its expense, a title insurance commitment for the Property (the “Title Commitment”), issued by the Title Company and naming Purchaser as the proposed insured within 20 days after the Effective Date. In the event the Title Commitment discloses any Seller Defects or any exceptions to title other than the Permitted Title Exceptions, Seller Shall, at its expense, either (A) cause the same to be removed as encumbrances to the Property prior to Closing or (B) terminate this Agreement, and the Earnest Money shall be returned to Purchaser. The obligation of Purchaser to proceed with Closing shall be subject to the condition precedent that the Title Company must issue to Purchaser at the Closing a Title Policy, subject to payment by Purchaser of the premium for such policy, and Seller shall reasonably cooperate with Purchaser’s efforts to cause the Title Company to issue such Title Policy.

6.3 Seller shall deliver to Purchaser, within five days after the Effective Date, a copy of the most recent survey of the Property in its possession (the “Survey”). Purchaser may at its expense cause the Property to be re-surveyed (or the Survey updated) by a reputable registered land surveyor prior to Closing. In the event Purchaser does cause the Property to be so re-surveyed or the Survey updated, the property description to be included in the Deed shall be prepared from the Survey (to the extent consistent with the deed into Seller, and then only if such Survey is certified to Seller).

7. Broker. The Parties each warrant and represent to the other that each such Party has not employed or dealt with a real estate broker or agent in connection with the Property, other than Commercial Advisors, LLC (“Broker”) employed by Seller. Seller shall be responsible for any brokerage commission payable to Broker. The Parties covenant and agree, each to the other, to indemnify the other against any loss, liability, costs (including reasonable attorney fees and expenses actually incurred), claims, demands, damages, actions, causes of action, and suits arising out of or in any manner related to the alleged employment or use by the indemnifying Party of any real estate broker or agent other than Broker. The provisions of this Paragraph 7 shall survive Closing.

8. Eminent Domain. If, after the Effective Date, Seller receives notice of the commencement of threatened commencement of eminent domain or other like proceedings against any portion of the Property not theretofore acquired by Purchaser, Seller shall promptly

- 5 -

give Notice thereof to Purchaser (any of the foregoing, a “Taking”). In the event of a Taking, Purchaser may terminate this Agreement, along with any obligation to purchase the Property, and the Parties shall have no further rights or obligations hereunder, except for those which explicitly survive such a termination by their terms, and the Earnest Money shall be returned to Purchaser. If Purchaser does not elect to terminate this Agreement, Seller shall assign to Purchaser all rights under the Taking and the Closing shall occur with no adjustment to the Purchase Price.

9. Casualty. If any part of the Property is physically damaged after the Effective Date, Seller shall give Notice to Purchaser of such damage and of Seller’s insurance coverage (and whether Seller is willing to allow the proceeds of such insurance to be used to restore the Property or to afford a reduction to the Purchase Price in the amount of such proceeds) ( a “Casualty”). In the event of a Casualty, Purchaser may terminate this Agreement, along with any obligation to purchase the Property and the Parties shall have no further rights or obligations hereunder, except for those which explicitly survive such a termination by their terms, and the Earnest Money shall be returned to Purchaser. If Purchaser does not elect to terminate this Agreement, the Closing shall occur with no adjustment to the Purchase Price (other than for any insurance proceeds Seller elects to credit).

10. Documents. For and in consideration of, and as a condition precedent to Purchaser’s delivery to Seller of the Purchase Price at Closing. Seller shall obtain and deliver to Purchaser at Closing the following documents (all of which shall be duly executed and witnessed, which documents Purchaser agrees to execute where required):

10.1 The Deed, subject only to the Permitted Title Exceptions;

10.2 An affidavit of title or customary indemnification regarding actions of Seller that may not be reflected in the public records in form reasonably satisfactory to the Title Company for the purpose of issuing its extended coverage owner’s policy of title insurance without exception for mechanic’s, materialmen’s or other statutory liens, for unrecorded easements, or for the rights of parties in possession:

10.3 Evidence that Seller is not a foreign person against whom withholding is required under the Internal Revenue Code, or applicable state law, without which Purchaser shall withhold as required;

10.4 Each Party shall deliver to the other Party appropriate evidence to establish the authority of such Party to perform its obligations hereunder at Closing;

10.5 The Parties shall also deliver a closing statement, any escrow instructions, transfer tax declarations and other documents reasonably necessary to complete and evidence the transaction contemplated hereby; and

10.6 Such estoppel certificates as may be necessary to evidence to Purchaser’s reasonable satisfaction that, with regard to any restrictive covenants or agreements affecting the Property (if any), no material default exists as of the Closing Date.

- 6 -

11. Default and Remedies. In the event of any default by any Party in its obligations hereunder, the other Party shall have the right to proceed with all remedies available at law or in equity including, without limitation, specific performance (and the Parties hereby stipulate and agree that specific performance is an appropriate remedy hereunder).

12. Condition of Property. Purchaser agrees that it accepts the Property on the Closing Date on an “as-is,” “where is,” and “with all faults” basis and condition. Purchaser acknowledges that Seller has no obligation whatsoever to remediate or improve the Property, including but not limited to the environmental condition of the Property, or any existing improvements located thereon. Purchaser expressly acknowledges and agrees that Seller has not and does not make any representation, covenant, or warranty, express or implied, regarding the condition of the Property or the fitness of the Property for any intended or particular use, any and all such representations, covenants, and warranties, express or implied, being hereby expressly denied by Seller and waived by Purchaser. Purchaser agrees that, by acquiring title to the Property, Purchaser thereby forever remises, releases, waives, and discharges all claims, causes of action, and demands against Seller from the date of Closing forward, under any federal, state or local environmental laws, rules, regulations, ordinances, and orders, at law or in equity, which Purchaser has or shall , can, or may have or acquire, including but not limited to cross-claims, arising from or relating to any and all conditions of the Property, including but not limited to its environmental condition.

13. Possession. Seller shall deliver actual and exclusive possession of the Property at Closing.

14. Representations and Warranties.

14.1 Seller represents and warrants to Purchaser that, to Seller’s Knowledge: (a) Seller has not received any written notice of any present legal proceeding or pending condemnation against the Property; (b) during Seller’s ownership of the Property, Seller has not brought on, or generated, used or stored, or disposed of upon the Property any hazardous materials in material violation of any laws, rules or regulations relating to the same; (c) Seller has not received any written notice (i) from any federal, state, county or municipal authority alleging any fire, health, safety, building, pollution, environmental, zoning or other violation of law with respect to the Property or any part thereof, including, without limitation, the occupancy or operation thereof, which has not been corrected in all material respects; (ii) by way of any written claims or adverse written reports of a material nature concerning the physical condition of the Property or of major defects or impairments of normal operating conditions in any component of the Property which have not been cured, nor has Seller received any written notification or written reports from any general contractor, engineer, architect or inspector or consultant that any work is required to be done in connection with the Property which remains outstanding and, if not addressed, would have a material adverse effect on the continued use and operation of the Property; and (iii) of any pending property insurance claims relating to the Property; and (d) Seller is not a party to any existing contract with third parties related to the maintenance, remediation or operation of the Property other than any that it will terminate prior to Closing.

- 7 -

14.2 Each party hereto warrants and represents that: (a) such party has full and complete authority to enter into this Agreement and each person executing this Agreement on behalf of a party warrants and represents that he has been fully authorized to execute this Agreement on behalf of such party and that such party is bound by the signature of such representative; and (b) each party has been afforded the opportunity to be represented by counsel of its choice in connection with the execution of this Agreement and has had ample opportunity to read, review, and understand the provisions of this Agreement.

15. Miscellaneous

15.1 Notice. Wherever any notice or other communication is required or permitted hereunder (“Notice”), such Notice shall be in writing and shall be delivered by hand, by nationally-recognized overnight express delivery service, by U. S. registered or certified mail, return receipt requested, postage prepaid, to the addresses set forth on the first page of this Agreement and set out below or at such other addresses as are specified by written notice delivered in accordance herewith:

Notice to Purchaser:

Kansas City Life Insurance Company

3520 Broadway

Kansas City, Missouri 64111-2565

Attention: Gregory M. Galvin

816.753.7000

ggalvin@kclife.com

Notice to Seller:

4100 Quest, LLC

6 Logue Court

Greenville, South Carolina 29615

Attention: General Counsel

With a Copy to:

Nelson Mullins Riley & Scarborough LLP

100 North Tryon Street

Suite 4200

Charlotte, North Carolina 28202

Attention: Francis C. Pray, Jr.

Any notice or other communication mailed as hereinabove provided shall be deemed effectively given and received (a) on the date of delivery, if delivered by hand or overnight express delivery service; or (b) on the date indicated on the return receipt if mailed (or, if not accepted, three Business Days after depositing in the mail). If any notice mailed is properly addressed but returned for any reason, such notice shall be deemed to be effective notice and to be given on the date of mailing.

- 8 -

15.2 Time of Essence. Time is of the essence of this Agreement.

15.3 Entire Agreement. This Agreement constitutes the entire agreement of the Parties and may not be amended except by written instrument executed by Purchaser and Seller.

15.4 Interpretation. The paragraph headings are inserted for convenience only and are in no way intended to interpret, define, or limit the scope or content of this Agreement or any provision hereof. If any Party is made up of more than one person or entity, then all such persons and entities shall be included jointly and severally, even though the defined term for such Party is used in the singular in this Agreement. If any right of approval or consent by a Party is provided for in this Agreement, the Party shall exercise the right promptly, in good faith and reasonably, unless this Agreement expressly gives such Party the right to use its sole discretion. If any time period under this Agreement ends on a day other than a Business Day, then the time period shall be extended until the next Business Day.

15.5 Survival and Termination. The provisions of this Agreement shall survive the Closing and shall remain in full force and effect only with respect to those rights, duties and obligations of Seller and Purchaser which are expressly stated herein to survive and be performed after the Closing. “Terminate” or Termination” shall mean the termination of this Agreement pursuant to any provision of this Agreement expressly providing for such termination.

15.6 Applicable Law. This Agreement shall be construed and interpreted in accordance with the substantive laws of the State of Tennessee.

15.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Any assignment hereof by Purchaser shall be subject to the prior written consent of Seller in its sole discretion. Any permitted assignment shall be in writing, and the assignee shall assume and agree to observe and perform all of the obligations and duties of Purchaser under this Agreement.

15.8 Exhibits. The exhibits referred to in and attached to this Agreement are incorporated herein in full by reference.

15.9 Counterpart Execution; Electronic Delivery. This Agreement may be executed in separate counterparts. It shall be fully executed when each Party whose signature is required has signed at least one counterpart even though no one counterpart contains the signatures of all the Parties. Executed counterparts of this Agreement may be delivered by facsimile, email or other electronics transmission with the same force and effect as if originals had been delivered to the Parties. At the request of any Party, all Parties shall promptly execute and deliver to the Parties multiple originals sufficient for each Party to possess two fully executed originals of this Agreement.

- 9 -

15.10 Severability. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations, and is intended, and shall for all purposes be deemed to be a single, integrated document setting forth all of the agreements and understandings of the Parties, and superseding all prior negotiations, understandings and agreements of such Parties with respect to the sale of the Property. If any term or provision of this Agreement or the application thereof to any person or circumstance shall for any reason and to any extent be held to be invalid or unenforceable, then such term or provision shall be ignored, and to the maximum extent possible, this Agreement shall continue in full force and effect, but without giving effect to such term or provision.

15.11 No Partnership. Seller and Purchaser acknowledge and agree that the existence of this Agreement does not in any way whatsoever create or constitute any kind of partnership or joint venture of any nature between Seller and Purchaser. The sole and exclusive legal relationship created by this Agreement is a relationship as seller and purchaser only.

15.12 Confidentiality. This Agreement and the contents hereof are confidential and, except for disclosure hereof on a confidential basis to any accountants, attorneys and other professional advisors retained by any Party in connection with the transactions contemplated hereby or as otherwise required by law or regulation (including, without limitation, any filings with the U.S. Securities and Exchange Commission) may not be disclosed in whole or in part to any person or entity without the prior written consent of the non-disclosing Party.

IN WITNESS WHEREOF, the Parties have set their hands and seals hereto as of the day and year first above written.

PURCHASER:
KANSAS CITY LIFE INSURANCE COMPANY
By:	/s/ Tracy W. Knapp
Name:	Tracy W. Knapp
Date:	12/12/07
Title:	Senior Vice President
SELLER:
4100 QUEST, LLC
By:	/s/ Andrea D. Meade
Name:	Andrea D. Meade
Date:	12/13/07
Title:	Executive VP Operations & Corp. Dev.

- 10 -

EX-10.32

Exhibit 10.32

4100 QUEST, LLC

6 Logue Court

Greenville, South Carolina 29615

January 18, 2008

KANSAS CITY LIFE INSURANCE COMPANY

3520 Broadway

Kansas City, Missouri 64111-2565

Re: Purchase and Sale Agreement dated as of December 13, 2007

Ladies and Gentlemen:

Reference is made to that certain Purchase and Sale Agreement (the “Purchase Agreement”) dated as of December 13, 2007, between Kansas City Life Insurance Company (the “Purchaser”) and 4100 Quest, LLC (the “Seller”). All capitalized terms not otherwise defined herein shall have such meaning as set forth in the Purchase Agreement.

For valuable consideration, the receipt and sufficiency of which, is hereby acknowledged, Purchaser and Seller hereby agree that Section 5.1 of the Purchase Agreement is hereby amended such that the inspection Period shall expire at the close of business on Wednesday, January 30, 2008.

Except as specifically modified hereby, each term and provision of the Purchase Agreement shall remain in full force and effect. In the event that any of the terms or the provisions of the Purchase Agreement are inconsistent or contradictory of the terms hereof, the terms of this letter agreement shall control.

The invalidity or unenforceability of any one or more phrases, sentences, clauses, or paragraphs contained in this letter agreement shall not affect the validity or enforceability of the remaining portions of this letter agreement or any part of the Purchase Agreement This letter agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. This letter agreement may be delivered by facsimile transmission with the same force and effect as if originally executed copies of this letter agreement were delivered to all parties hereto. This letter agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.

KANSAS CITY LIFE INSURANCE COMPANY

January 18, 2008

Page 2

Please acknowledge your agreement by executing this letter agreement as indicated below.

Sincerely,
4100 QUEST, LLC
By:	/s/ Andrea D. Meade
Name:	Andrea D. Meade
Title:	EVP, Operations and Corporate Development

ACKNOWLEDGED AND AGREED:
KANSAS CITY LIFE INSURANCE COMPANY
By:	/s/ Tracy W. Knapp
Name:	Tracy W. Knapp
Title:	SVP, Finance

EX-10.33

Exhibit 10.33

4100 QUEST, LLC

6 Logue Court

Greenville, South Carolina 29615

January 30, 2008

KANSAS CITY LIFE INSURANCE COMPANY

3520 Broadway

Kansas City, Missouri 64111-2565

Re: Purchase and Sale Agreement dated as of December 13, 2007

Ladies and Gentlemen:

Reference is made to that certain Purchase and Sale Agreement dated as of December 13, 2007, between Kansas City Life Insurance Company (the “Purchaser”) and 4100 Quest, LLC (the “Seller”), as modified by that certain letter agreement dated January 18, 2008 between Purchaser and Seller (as so modified, the “Purchase Agreement”). All capitalized terms not otherwise defined herein shall have such meaning as set forth in the Purchase Agreement.

For valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Purchaser and Seller hereby agree that the Purchase Agreement is hereby amended as follows:

1. The Purchase Price is reduced by $7,500.

2. The Inspection Period has expired. Purchaser hereby confirms that it has conducted all Inspections that Purchaser has desired with respect to the Property and Purchaser accepts the condition of the Property as existing on the date of this letter agreement.

3. Purchaser hereby confirms that it has examined title to the Property and that such title is free from Seller Defects as of the date of this letter agreement (and any exceptions to title existing as of such date are hereby deemed to be Permitted Title Exceptions).

4. The Closing Date shall be February 15, 2008, time being of the essence, and the closing shall be conducted at noon (eastern time) on such date by the Escrow Agent. No later than noon (eastern time) on February 14, 2008, Purchaser and Seller shall deliver to the Escrow Agent all documentation and other items necessary to consummate the closing (including, without limitation, delivery by the Purchaser of the remaining balance of the Purchase Price).

5. In addition to conveying the Property to Purchaser, on the Closing Date Seller shall deliver a bill of sale (without any increase in the Purchase Price) for that certain generator located on the Properly on an as-is, where-is, with all faults basis, with no representation or warranties on behalf of Seller, express or implied (all of which are hereby disclaimed).

KANSAS CITY LIFE INSURANCE COMPANY

January 30, 2008

Page 2

Except as specifically modified hereby, each term and provision of the Purchase Agreement shall remain in full force and effect. In the event that any of the terms or the provisions of the Purchase Agreement are inconsistent or contradictory of the terms hereof, the terms of this letter agreement shall control.

The invalidity or unenforceability of any one or more phrases, sentences, clauses, or paragraphs contained in this letter agreement shall not affect the validity or enforceability of the remaining portions of this letter agreement or any part of the Purchase Agreement. This letter agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. This letter agreement may be delivered by facsimile transmission with the same force and effect as if originally executed copies of this letter agreement were delivered to all parties hereto. This letter agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.

Please acknowledge your agreement by executing this letter agreement as indicated below. This letter shall have no force or effect unless countersigned by the Purchaser and returned (by facsimile or email delivery of an executed counterpart hereof, which all parties hereby agree constitutes an acceptable method of delivery of this letter agreement) to the Seller by 5:00 p.m. (eastern time) on January 30, 2008, time being of the essence.

Sincerely,
4100 QUEST, LLC
By:	/s/ Andrea D. Meade
Name:	Andrea D. Meade
Title:	EVP, Operations & Corporate Development

ACKNOWLEDGED AND AGREED:
KANSAS CITY LIFE INSURANCE COMPANY
By:	/s/ Gregory M. Galvin
Name:	Gregory M. Galvin
Title:	AVP

EX-13.1

Exhibit 13.1

ANNUAL REPORT 2008

ScanSourceR

Inc.

ScanSourceR

INC.

THIS IS

WHO WE ARE.

THIS IS

SCANSOURCE.

2

THIS IS SCANSOURCE.

What does ScanSource,Inc represent to its customers and vendor partners?

We represent an unwavering dedication to helping value-added resellers succeed in their chosen markets through unmatched support, services and tools. We represent robust pre-sale support designed to help our reseller choose the right solutions. Our buy solutions – not products – and our team helps them get the right ones for the challenges they face. In addition, ScanSource represents powerful pre- and post-sale technical support from an experienced team of expert, via telephone, email, in person or web tools.

And we represent financial needs that are customized of fit the needs of each specific customer. ScanSource’s consistently strong financial performance allows us to help strengthen the channel, providing credit solutions and financial services to our customer and maintaining the right level of inventory in our distribution center. In doing so, we can fill the gap between the manufacturer and the reseller.

After 15 years of growth, we have a solid balance sheet that enables us to invest in the channel even when the economic climate is difficult. To our customers and vendors, we are partners for the long haul.

ScanSource also represents a strong focus on taking costs out of the supply chain. We represent a commitment to the core principles of distribution – getting the right people at the right time.

Comprehensive service and tools for our partners

Powerful sales and technical support

Customized financial solutions for our customers

Taking costs out of the supply chain

THIS IS WHO WE ARE. THIS IS SCANSOURCE.

3

THIS IS ONE COMPANY WITH MANY OPPORTUNITIES FOR GROWTH.

As a value-added distributor of specialty technology products, ScanSource, Inc.’s mission is to get products through the supply chain quickly and efficiently. To help achieve this goal, we dedicate sales, technical and merchandising teams. To specific technologies to give our customers the focused attention they deserve. As such, our North American segment includes four distinct brands – each focused on a particular technology yet.

ScanSource POS & Barcoding markets identification and data collection (AIDC) and point-of-sale (POS) products include mobile data collection computers, wireless infrastructure, bar code scanners and label printers, as well as point of sale systems and peripherals designed for a variety of retail, hospitality, food service and convenience store markets.

Catalyst Telecom markets voice, data, video and converged communication systems in the U.S. It is a distributor of Avaya communications solutions, including Avaya Global Communications Solutions (GCS), Small Market Business Solutions (SMBS) and Internet Protocol (IP) products. Catalyst Telecom also markets products complementary to the Avaya product line from vendors including Aruba Networks, Extreme Networks, Juniper Networks, Plantronics, and Polycom.

ScanSource Security focuses on hardware distribution of electronic security equipment. The product offering includes identification, access control, surveillance/ CCTV, wireless infrastructure and instrusion products.

ScanSource Communications delivers total communications solutions, including video and audio conferencing products; telephony solutions, including Voice over IP (VoIP) and computer telephony building blocks.

4

OUR NORTH AMERICAN

SEGMENT INCLUDES FOUR DISTINCT BRANDS

– EACH FOCUSED ON A PARTICULAR

TECHNOLOGY SET.

5

THIS IS AN INTERNATIONAL COMPANY.

Scansource continues to strengthen its position in geographies around the globe. And our business model has proven to be highly successful internationally. The company’s international segment distributes specialty technology products to customers in Europe and Latin America.

ScanSource Europe is headquartered in Brussels, Belgium and has offices in France, Germany, the United Kingdom and the Netherlands. ScanSource Latin America is headquartered Miami, with distribution centers in Florida and Mexico City. It provides solutions to customers in Mexico, Central America, South America and the Caribbean.

The same sales and marketing strategies that helped us to be successful in North America have also been effective in helping us to establish a strong presence in Latin American and Europe. We have also localized our offerings and adjusted our business model to accommodate international customers and meet their specific needs.

In the coming years, ScanSource expects to provide even more technologies to more customers internationally. With these markets still in the early stages of maturity, we believe our expanding international segment will continue to provide an opportunity for growth for years to come.

$1.47 05

$1.67 06

$1.99 07

$2.18 08

NET SALES

FISCAL YEAR ENDED JUNE 30

($ IN BILLIONS)

6

THIS IS RESELLER SUPPORT.

ScanSource views its reseller customers as partners. Because we only sell to resellers and newer to end users, our business can thrive only when our customers are growing. That’s why we offer a power lineup of services and tools to help them succeed.

We support resellers in a number of critical ways. Our technical resources include an experienced team of technical support experts who help resellers address day-to-day technology challenges. We also offer professional services and online technical support.

ScanSource’s education programs deliver training online and at various events in locations throughout the country, helping customers get up to speed on the latest products, industry trends, vertical markets and more. We also offer customized, flexible financing programs to give resellers access to the cash they need to close deals and attract new customers.

Our Partner Marketing program allows our customers to develop ad agency-quality marketing at a cost-efficient rate. Resellers can get expert consultation on developing a marketing plan and gain assistance in the creation of customized materials like direct mail, advertisements, e-mail and more.

BECAUSE WE ONLY SELL TO

RESELLERS

AND NEVER TO END USERS, OUR

BUSINESS CAN THRIVE ONLY WHEN

OUR CUSTOMERS ARE

GROWING.

7

THE NEW 600,000–SQUARE-FOOT

DISTRIBUTION CENTER

IS NEARLY DOUBLE THE SIZE OF

THE PREVIOUS FACILITY AND

FEATURES A TECHNOLOGY ADVANCED

CONVEYOR SYSTEM.

$39.8 06

$42.6 07

$55.6 08

NET INCOME

FISCAL YEAR ENDED JUNE 30

($ IN MILLIONS)

8

THIS IS LOGISTIC EXCELLENCE.

At ScanSource, Inc., we never lose sight of who we are. For our customers and vendors to succeed, they need a partner like us who can always deliver on the basics – a large inventory and timely delivery of products.

Logistics excellence is part of the very foundation of our company. And as ScanSource looks to the future, this commitment to excellence will only be enhanced by the unveiling of our new, expanded distribution center in Southaven, Mississippi, near Memphis freight carrier hub.

The new 600,000-sqaure-foot distribution center is nearly double the size of the previous facility and features a technologically advanced conveyor systems. It is also includes a 30,000-square-foot Custom Configuration Center, greater warehousing capacity and enhanced storage space.

The new location is even closer to the Memphis airport than the previous facility and will allow us to continue to provide exceptional FedEx and UPS delivery times. ScanSource operates under a centralized distribution model, where all products are housed in one distribution center in a single geographic location. This approach is designed to provide improved efficiency and cost-effectiveness and to ensure products are in stock and ready to ship on the same day they are ordered.

9

TO OUR SHAREHOLDERS:

With more than 15 years of successfully serving our customers and vendors at ScanSource, Inc., we have learned what our core strengths are. Now, as we look to the future, we are building on those strengths to set the tone for a new era of leadership in the specialty technology industry.

Who is ScanSource? We’re a company with a deep passion for helping our value-added reseller customers be successful and grow. And we’re a company that is using our strong foundation and solid balance sheet to invest in new services and tools for our customers and new opportunities for growth for ScanSource and our vendor partners.

These are uncertain economic times, to be sure. But ScanSource’s legacy of growth since 1992 has given us the ability to continue investing in the channel regardless of the economic climate. We will always maintain a focus on driving costs out of the channel and helping get solutions to market more efficiently. From our beginnings in 1992, we’ve known what we do well and we’ve remained committed to it. More than ever, that commitment will be at the foundation of everything we do in the future.

Indeed, that commitment was behind the opening of our new, 600,000-square-foot distribution center in Southaven, Mississippi, this past year. This new facility provides us with the capacity for growth in North America, and it features state-of-the-art technology that is designed to allow us to be more efficient.

The new warehouse includes a technologically advanced “picking, packing and shipping” conveyor system, as well as a 30,000-square-foot Custom Configuration Center where a team of professionals provides system integration and builds customized solutions. Even though the new address is in Mississippi, this facility is even closer to the Memphis airport and its freight carrier hub than our previous distribution center, allowing us to continue to provide our customers with the best service levels in the industry.

The opening of the new warehouse was just one of many highlights for ScanSource, Inc. in fiscal year 2008. ScanSource posted record net sales revenues of $2.18 billion this year, up 9.5% from $1.99 billion for the year ended June 30, 2007. In addition, net income rose to $55.6 million compared to $42.6 million for the previous year. And diluted earnings per share increased to $2.10, moving up from $1.63 per share in fiscal year 2007.

In October 2007, two of our communications business units, Paracon and T2 Supply, were combined to create ScanSource Communications, forming a stronger product line that brings together high-quality communications, voice and data solutions with industry-leading videoconferencing and audio conferencing products. Jill Phillips, former president of T2 Supply, leads the ScanSource Communications management team as president, providing both industry experience and a strong vision for building ScanSource Communications into a comprehensive value-added distributor of total communications solutions.

This combined unit offers a number of benefits for our customers. They get access to a deeper, more comprehensive lineup of products and are offered new avenues for sales and technical support consultation. Customers will be provided expanded education and training opportunities. The increased bandwidth and strengthened sales and business development teams offer resellers unmatched support in these technologies. We believe the synergies created by the combination of these two business units put ScanSource Communications in a strong position to grow.

10

Scott Benbenek & Mike Baur

Our ScanSource POS & Barcoding unit continued its steady growth in 2008. In January 2008, Jeff Yelton was named president of ScanSource North America POS & Barcoding, where he overseas the unit’s overall strategic direction, growth initiatives and assest management. Formerly the vice president of merchandising for ScanSource POS & Barcoding. Jeff brings nearly 20 years of experience in management and leadership positions with technology companies focused on the channel. Over the past few years, he has been an integral part of POS & Barcoding unit’s growth , and he will continue to be a driving force for the company in the years ahead.

At a time when several of our AIDC and POS vendor partners are consolidating and the industry is undergoing change, we continue to find new avenues for growth in this segment of our business. Throughout the history or our company, we have seized on changes in the marketplace to create new opportunities and a new potential for growth.

Indeed, just such an opportunity exists in the telecommunications industry, where sweeping changes has been the norm for the last several year. Our largest communications vendor partners, Avaya, was purchased by new ownership a little more than a year ago. We view this development with optimism and look forward to the opportunities it will provide for our Catalyst Telecom sales unit.

Catalyst reinforced its commitment to educating its customers on implementing and embracing convergence technologies. Long an industry buzzword, convergence is poised to break through as a significance opportunity for growth for Catalyst dealers. Catalyst enhanced its CommEdge convergence education program in the past year, adding a series of CommEdge road shows in locations throughout the country to allow dealers to see convergence solutions in action and walk away with sales and marketing plans to support them.

Further, the company introduced the Catalyst University program jointly with its manufacturer partners to help dealers quickly and easily get access to training and product data from vendors and to bring their sales team up to speed on the latest development. The program includes a comprehensive online learning center with vendor training, product information and much more. And in a continuing sign of the importance of network convergence in the communications industry. Catalyst added SonicWALL to its product lineup, giving its customers access to the company’s secure network infrastructure solutions.

Our ScanSource Security unit formed important new vendor partnerships in 2008. In April, ScanSource security completed an agreement to distribute the broad line of security solutions

WE ARE A COMPANY WITH A DEEP PASSION FOR HELPING OUR VALUE-ADDED RESELLER CUSTOMERS BE SUCCESSFUL AND GROW.

11

from GE Security. This new partnership should only enhance the sales of IP-related security products, paving the way for new growth in this leading-edge technology. The company also enhanced its offering in wireless mesh and access networks by adding Firetide to its lineup in June. One of the fastest growing segments of our business, the security market continues to develop by embracing the value-added distribution model. As such, it offers a strong opportunity for our company to grow in the future.

Like many of the other sales units, ScanSource security made a strong push to educate its customer base on new technologies and sales opportunities this year. Starting in June, ScanSource security rolled out a series of IP workshops at locations around the country. The sessions were designed to train dealers on the basics of networking, provide an introduction to network video and offer hands-on demonstrations of the latest networking physical security solutions.

We continue to enjoy a surge in growth internationally and made several moves this year to position our company for even more growth in the future. In April, we purchased MTV Telecom Distribution, a leading voice and data distributor based in the united Kingdom. This acquisition gives our U.K. customers access to a strong line of vendor partners, including Avaya, Siemens, Panasonic and Swyx, and gives our company the opportunity to potentially expand our sales of communications products into Europe. Our communications vendors have experienced great success in the US through our Catalyst Telecom and ScanSource Communications sales units, and the purchase of MTV telecom represents our commitment to helping them achieve the same level of success internationally.

We laid the groundwork for future growth in other significant ways this year. In October 2007, ScanSource announced that it had entered into a $250 million multicurrency revolving credit facility, arranged by JP Morgan and featuring a $50 million accordion feature that allows the company to increase the revolving credit line up to a total of $300 million. Wachovia Bank serves as the syndication agent and Regions Bank and WellsFargo serve as documentation agents. the strong demand by lenders to participate in the new facility is a testament to our company’s solid financial position and includes improved terms and conditions from our previous facility.

ScanSource, Inc. sponsored two education and networking conferences – called IMPACT NOW – in San Diego and Orlando this year. IMPACT NOW is a one-of-a-kind event in our industry, bringing together the leading vendor executives with resellers from around the country. At the Orlando conference, former General Electric Chairman and CEO Jack Welch led an interactive Q&A with an audience of hundreds of resellers, sharing his insights on management and leadership. Both shows featured powerful networking opportunities with the industry’s leading vendors, plus business-building workshops on topics such as effective sales and marketing tactics, and an exhibit floor with the latest products and solutions. IMPACT NOW represents another investment in growth opportunity for the company.

The success of the IMPACT NOW conferences led us to announce plans for an even bigger and better event this year. IMPACT NOW returns to Orlando in November 2008 and features an interactive session with Apple co-founder Steve Wozniak, powerful business workshops from the Disney institute, and a blow-out networking gathering at the Hard Rock live at universal studios. Indycar racing sensation and team Motorola driver Danica Patrick will be stopping by the Motorola booth at IMPACT now to meet resellers in attendance.

In December 2007, we celebrated our 15th anniversary of carrying the torch for our vendor partners and customers. We’ve built a legacy of growth throughout our 15 years of operation, and that growth continued this year. In April, we moved up on the Fortune 1000 list of America’s largest corporations for the third

AT A TIME WHEN MANY OF OUR AIDC AND POS VENDOR PARTNERS ARE CONSOLIDATING AND THE INDUSTRY IS UNDERGOING CHANGE, WE CONTINUE TO FIND NEW AVENUES FOR GROWTH IN THIS SEGMENT OF OUR BUSINESS.

12

IN DECEMBER 2007, WE CELEBRATED OUR 15TH ANNIVERSARY OF CARRYING THE TORCH FOR OUR VENDOR PARTNERS AND CUSTOMERS.

straight year, landing at #901. We believe our growth is due to our highly skilled and enthusiastic employees and founded in that commitment we made long ago to do a few things very well – to have the right solutions and deliver them to the right people at the right time.

Comprehensive services and tools for our partners. Powerful sales and technical support. Customized financial solutions for our customers. Taking costs out of the supply chain. Empowered employees. After 15 years, this is still who we are.

Thank you to our 1000+ employees worldwide, our hard-working Board of Directors and all ScanSource, Inc. investors.

Sincerely,

Mike Baur

Chief Executive Officer

ScanSource, Inc.

Scott Benbenek

President, Worldwide Operations

ScanSource, Inc.

13

Selected Financial Data

The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis” and ScanSource, Inc.’s (the “Company”) consolidated financial statements and related notes thereto included elsewhere in this annual report.

The following statement of income data and balance sheet data were derived from the Company’s consolidated financial statements.

	Fiscal Year Ended June 30,
	2008(1)			2007(1)			2006		2005			2004
	(In thousands, except per share data)
Statement of income data:
Net sales		$2,175,485		$	1,986,927		$	1,665,600	$	1,469,094		$	1,192,090
Cost of goods sold		1,947,867			1,776,255			1,497,248		1,319,368			1,060,310
Gross profit		227,618			210,672			168,352		149,726			131,780
Selling, general and administrative expenses		133,653			135,339			105,042		90,970			83,601
Operating income		93,965			75,333			63,310		58,756			48,179
Interest expense (income), net		3,959			6,804			1,620		1,264			601
Other expense (income), net		(212	)		(144	)		57		(413	)		(169	)
Total other expense		3,747			6,660			1,677		851			432
Income before income taxes and minority interest		90,218			68,673			61,633		57,905			47,747
Provision for income taxes		34,586			25,987			21,592		22,010			18,489
Minority interest in income of consolidated subsidiaries, net of taxes		—			60			225		291			137
Net income	$	55,632		$	42,626		$	39,816	$	35,604		$	29,121
Net income per common share, basic	$	2.13		$	1.65		$	1.56	$	1.41		$	1.17
Weighted-average shares outstanding, basic		26,098			25,773			25,491		25,254			24,970
Net income per common share, diluted	$	2.10		$	1.63		$	1.53	$	1.37		$	1.13
Weighted-average shares outstanding, diluted		26,445			26,213			26,034		25,927			25,775
	As of June 30,
	2008			2007			2006		2005			2004
Balance sheet data:
Working capital	$	368,636		$	352,955		$	262,171	$	219,851		$	184,626
Total assets		772,206			738,448			617,497		469,604			414,764
Total long-term obligations (including current portion)		56,623			107,730			32,185		37,878			40,007
Total shareholders’ equity		395,753			324,744			273,409		225,212			184,752

⁽¹⁾ Included in the statement of income for the fiscal years ended June 30, 2008 and 2007 are $1.0 million and $9.9 million, respectively, of direct costs associated with the special committee review of the Company’s stock option practices. See Note 1A to the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.

15

Management’s Discussion and Analysis

Certain statements within this Annual Report to Shareholders and the documents incorporated by reference herein that are not historical facts are “forward-looking statements” as described in the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected. Factors that could cause actual results to differ materially include the following: our ability to retain key employees, particularly senior management; our ability to retain and expand our existing and new customer relationships; our dependence on vendors, product supply, and availability; our ability to centralize certain functions to provide efficient support to our business; our dependence upon information systems; our ability to manage the potential adverse effects of operating in foreign jurisdictions; our ability to manage and limit our credit exposure due to the deterioration in the financial condition of our customers; our ability to remain profitable in the face of narrow margins; our ability to compete in new and existing markets that are highly competitive; our ability to manage our business when general economic conditions are poor; our ability to effectively manage and implement our growth strategies; our ability to manage and negotiate successful pricing and stock rotation opportunities associated with inventory value decreases; our ability to anticipate adverse changes in tax laws, accounting rules, and other laws and regulations; our inability to eliminate potential volatility in our net sales and operating results on a quarterly basis as a result of changes in demand for our products; our dependence on third-party freight carriers; our inability to resolve or settle potentially adverse litigation matters; and our inability to obtain required capital at acceptable terms to fund our working capital and growth strategies. Additional discussion of these and other factors affecting our business and prospects is contained in our periodic filings with the SEC, copies of which can be obtained at our Investor Relations website at www.scansource.com. Please refer to the cautionary statements and important factors discussed in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended June 30, 2008 for further information. This discussion and analysis should be read in conjunction with “Selected Financial Data” and the Financial Statements and the Notes thereto included elsewhere in this Annual Report.

Overview

ScanSource, Inc. is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company distributes more than 55,000 products worldwide. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through the ScanSource POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its ScanSource Communications unit; and electronic security products and wireless infrastructure products through its ScanSource Security Distribution unit. The international distribution segment primarily markets AIDC and POS products through its ScanSource sales units. In addition, on April 4, 2008, the Company announced that it had expanded its communications business internationally through the acquisition of MTV Telecom (Distribution) PLC, a UK-based distributor of voice and data solutions.

16

The Company was incorporated in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally located distribution center located near the FedEx hub in Southaven, Mississippi. The single warehouse and strong management information system form the cornerstone of the Company’s cost-driven operational strategy that, along with our growth through acquisitions and organic market share increases, has caused operating income to grow at an average annual growth rate of 19.4% over the past five years, while sales have grown at an average annual rate of 17.1% to approximately $2.2 billion over the same period. This strategy has been expanded to Latin America and Europe, with distribution centers located in Florida and Mexico, and in Belgium, respectively.

North American Distribution Segment

The Company’s North American distribution segment sells products exclusively to resellers and integrators in large and growing technology markets. Key AIDC vendors include Cisco, Datalogic, Honeywell, Intermec, Motorola and Zebra, and leading POS lines include APG, Cherry, Elo, Epson America, IBM, Microsoft, NCR, and Posiflex. Key communications vendors include Avaya, Extreme Networks, Juniper Networks, Plantronics and Polycom, while Dialogic supplies key components for the converged communications market. Key electronic security vendors include Alvarion, Axis, Datacard, Digiop, DSC, Fargo, Firetide, GE Security, HID, Motorola Wireless, Panasonic, Sony, Tropos and Zebra Card. In July 2006, the Company purchased the assets of T2 Supply, LLC (“T2”) allowing the Company to enhance its long-term convergence strategy by adding video conferencing products and expertise, and to provide cross-selling opportunities to T2’s customer base of voice and video conferencing resellers. Growth in net sales has been principally driven by the acquisition of T2, intensive marketing efforts to recruit new reseller customers, selective expansion of the Company’s product lines, and the addition of new vendors. During fiscal 2008, the Company relocated its North American distribution center from Memphis, Tennessee to a 600,000 square foot facility located in Southaven, Mississippi to meet the current and near-term growth requirements of the North American business.

International Distribution Segment

The Company’s international distribution segment sells AIDC and POS products exclusively to resellers and integrators in the Latin American (including Mexican) and European markets principally from the same product manufacturers as those sold by the North American distribution segment. Marketing efforts to recruit new reseller customers, competitive product pricing, the addition of new vendors, and strategic acquisitions have driven growth in net sales.

The international distribution segment commenced operations in November 2001, when the Company acquired 52% of the common stock of Netpoint International, Inc. (“Netpoint”), a Miami-based distributor of AIDC and POS equipment to the Latin American market. In January 2002, the Company launched its pan-European strategy with the establishment of a distribution center and sales office in Belgium. In May 2002, the Company purchased ABC Technology Distribution (“ABC”), a distributor of AIDC and POS products based in the United Kingdom, allowing the Company to expand its European operations and make additional sales to former ABC customers in the United Kingdom. In March 2003, the Company completed its consolidation of the UK distribution center into the Belgium facility. In April 2005, the Company purchased Europdata Connect UK Ltd. (“EDC”), expanding its presence in the UK and the Netherlands. In April 2008, the Company acquired MTV

17

Telecom (Distribution) PLC, a UK based distributor of voice and data solutions. MTV Telecom vendors include Avaya, Siemens, Panasonic, and Swyx. The Company has centralized its management and operation functions in the Belgium headquarters location.

Cost Control/Profitability

The Company’s operating income growth has been driven by increasing gross profit and disciplined control of operating expenses. The Company’s operations feature a scalable information system, streamlined management, and centralized distribution, enabling it to achieve the economies of scale necessary for cost-effective order fulfillment. From its inception, the Company has managed its general and administrative expenses by maintaining strong cost controls. However, in order to continue to grow its markets, the Company has invested in new initiatives including investments in new geographic markets of Europe and Latin America, increased marketing efforts to recruit resellers, enhancements of employee benefit plans to retain employees, and strategic acquisitions in both the North American and International distribution segments.

Results of Operations

The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:

	Fiscal Year Ended June 30,
	2008		2007		2006
Statement of income data:
Net sales	100.0	%	100.0	%	100.0	%
Cost of goods sold	89.5		89.4		89.9
Gross profit	10.5		10.6		10.1
Selling, general and administrative expenses	6.2		6.8		6.3
Operating income	4.3		3.8		3.8
Interest expense (income), net	0.2		0.3		0.1
Other expense (income), net	—		—		—
Total other expense	0.2		0.3		0.1
Income before income taxes and minority interest	4.1		3.5		3.7
Provision for income taxes	1.5		1.3		1.3
Minority interest in income of consolidated subsidiaries, net of income taxes	—		—		—
Net income	2.6	%	2.2	%	2.4	%

18

Comparison of Fiscal Years Ended June 30, 2008 and 2007

Net Sales

The Company has two reporting segments, which are based on geographic location. The following table summarizes the Company’s net sales results (net of inter-segment sales) for each of these reporting segments for the comparable fiscal years ending June 30^th:

Product Category

	2008		2007		Difference		Percentage Change
	(In thousands)
POS, barcoding and security products	$	1,379,573	$	1,200,497	$	179,076	14.9	%
Communications products		795,912		786,430		9,482	1.2	%
Net Sales	$	2,175,485	$	1,986,927	$	188,558	9.5	%

Geographic Segments

	2008		2007		Difference		Percentage Change
	(In thousands)
North American distribution segment	$	1,777,534	$	1,669,648	$	107,886	6.5	%
International distribution segment		397,951		317,279		80,672	25.4	%
Total net sales	$	2,175,485	$	1,986,927	$	188,558	9.5	%

Consolidated net sales for the fiscal year ended June 30, 2008 increased 9.5% to $2.18 billion in comparison to prior fiscal year net sales of $1.99 billion.

North American Distribution

The North American distribution segment includes sales to technology resellers in the United States and Canada that originate from our centralized distribution facility now located in Southaven, Mississippi. We note that sales to technology resellers in Canada account for less than 5% of total net sales for both fiscal years presented. In the current fiscal year, net sales for this segment increased by $107.9 million, or 6.5%, as compared to the prior fiscal period.

The Company’s North American POS, barcoding, and security product category sales increased 11.6% in comparison to the prior fiscal year. This increase was primarily driven by sales growth in our scanning and mobility products, and to a lesser extent, sales growth in our security product lines. The Company continues to grow by continually adding new product lines and attracting new resellers who previously bought directly from manufacturers and other distributors. The Company continues to hire additional sales representatives to better serve our new and existing customers in these product lines.

The Company has two North American sales units that sell communications products to our customers—the Catalyst Telecom sales unit and the newly formed ScanSource Communications sales unit. ScanSource Communications was formed in January 2008 through the merger of former sales units T2 Supply and Paracon. The Company believes this merger will enable more sales and support resources for the units’ customers. In the current fiscal year, net sales of communication products

19

lines increased only slightly over the prior fiscal year to approximately $0.8 billion. A 13.3% increase in sales in the ScanSource Communications sales unit was offset by a 2.2% decrease in sales in our Catalyst Telecom sales unit. Sales in our Catalyst Telecom business unit were negatively impacted by a key vendor’s unsuccessful new product roll-out during the current fiscal year. As a result, purchases by our resellers were either delayed or lost to competitive products of other vendors due to an adverse reaction to the terms and conditions of the new product. While the vendor subsequently announced corrective changes to the program, our sales were adversely impacted during the current fiscal year.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource POS and Barcoding sales unit. Prior to this fiscal year, our European operations only sold POS and barcoding product lines. However, in April 2008, the Company further expanded its communications business internationally through the acquisition of MTV Telecom (Distribution) PLC, a UK-based distributor of voice and data solutions. Sales of communications products were immaterial for the fiscal year ended June 30, 2008. Sales for the overall international segment increased 25.4% or $80.7 million as compared to the prior fiscal year, comprised of sales growth of 30.9% and 7.5% in Europe and Latin America, respectively.

Sales during the fiscal year ended June 30, 2008 were favorably impacted by foreign exchange fluctuations of $34.8 million. Without the foreign exchange fluctuations, the increase in sales for the fiscal year would have been $45.9 million or 14.5%. Although management cannot forecast the future direction of foreign exchange rate movements, if significant unfavorable changes in exchange rates occur, net sales of the segment could be adversely affected.

Gross Profit

The following table summarizes the Company’s gross profit for the fiscal years ended June 30th:

							Percentage Change		Percentage of Net Sales
	2008		2007		Difference				2008		2007
	(In thousands)
North American distribution segment	$	176,692	$	169,627	$	7,065	4.2	%	9.9	%	10.2	%
International distribution segment		50,926		41,045		9,881	24.1	%	12.8	%	12.9	%
Total gross profit	$	227,618	$	210,672	$	16,946	8.0	%	10.5	%	10.6	%

North American Distribution

Gross profit for the North American distribution segment increased $7.1 million, or 4.2%, for the fiscal year ended June 30, 2008 as compared to the prior fiscal year. The increase in gross profit for the year ended June 30, 2008 is a result of increased sales volume of the segment, as previously discussed. Gross profit for the North America distribution segment, expressed as a percentage of net sales, decreased slightly to 9.9% of sales for fiscal year 2008 as compared to 10.2% of sales for the prior fiscal year. This decrease is largely attributable to a less favorable product mix resulting from lower sales in the Company’s Catalyst Telecom sales unit and higher freight costs.

20

International Distribution

Gross profit for the international distribution segment increased $9.9 million, or 24.1% for the fiscal year ended June 30, 2008, as compared to the prior fiscal year. The increase was primarily due to increased sales volume, as previously discussed. Gross profit of this segment, expressed as a percentage of net sales, is typically greater than the North American distribution segment. In the current fiscal year this percentage decreased slightly to 12.8%, as compared to 12.9% in the prior fiscal year.

Operating Expenses

The following table summarizes the Company’s operating expenses for the periods ended June 30th:

								Percentage Change		Percentage of Net Sales
	2008		2007		Difference					2008		2007
				(In thousands)
Operating expenses	$	133,653	$	135,339	$	(1,686	)	-1.2	%	6.2	%	6.8	%

For the fiscal year ended June 30, 2008, operating expenses were $133.7 million, which was slightly lower than the prior fiscal year. The comparability of operating expenses between these two periods is impacted by approximately $9.9 million of legal and professional fees incurred in the prior fiscal year related to the Company’s stock option investigation and remediation activities. In the current fiscal year, the Company has incurred approximately $1.0 million of fees associated with this matter. Therefore, excluding expenditures related to this matter, operating expenses would have increased by $7.2 million, or approximately 5.8% in the current fiscal year. This increase is comprised primarily of $9.3 million in higher salaries and employee benefits due to higher headcounts worldwide, partially offset by a $2.4 million reduction in bad debts in comparison to the prior fiscal year.

Operating expenses, expressed as a percentage of sales, decreased to 6.2% in the current fiscal year, from 6.8% in the comparable fiscal year. As discussed previously, this decrease is largely attributable to the legal and professional fees incurred in connection with our stock option investigation. Excluding these expenditures in the prior year, this ratio would have been 6.3%. The Company continues to benefit from greater economies of scale associated with the Company’s worldwide expansion of capacity and employee headcount. Pursuant to achieving internal goals during the fiscal year ended June 30, 2008, the Company recorded world-wide profit-sharing expense of $7.5 million compared to $5.5 million for the fiscal year ended June 30, 2007.

Operating Income

The following table summarizes the Company’s operating income for the fiscal years ended June 30th:

							Percentage Change		Percentage of Net Sales
	2008		2007		Difference				2008		2007
	(In thousands)
Operating income	$	93,965	$	75,333	$	18,632	24.7	%	4.3	%	3.8	%

21

Operating income increased 24.7% or $18.6 million for the fiscal year ended June 30, 2008 as compared to the prior fiscal year. This increase is attributable to higher sales volumes achieved in both our North American and international distribution segments, as well as significantly lower expenditures related to the Special Committee investigation into our stock option granting practices. As a result, operating income, expressed as a percentage of net sales, increased to 4.3% in the current fiscal year, compared to 3.8% in the prior fiscal year. The expenditures related to the Special Committee investigation had a (0.1)% and (0.5)% impact on operating income expressed as a percentage of net sales for the fiscal years ended June 30, 2008 and 2007, respectively.

Total Other Expense (Income)

The following table summarizes the Company’s total other expense (income) for the fiscal years ended June 30th:

										Percentage Change		Percentage of Net Sales
	2008			2007			Difference					2008		2007
	(In thousands)
Interest expense	$	5,471		$	7,689		$	(2,218	)	-28.8	%	0.3	%	0.4	%
Interest income		(1,512	)		(885	)		(627	)	70.8	%	-0.1	%	-0.1	%
Foreign exchange loss (gain), net		194			190			4		2.1	%	0.0	%	0.0	%
Other, net		(406	)		(334	)		(72	)	21.6	%	0.0	%	0.0	%
Total other expense (income)		3,747			6,660			(2,913	)	-43.7	%	0.2	%	0.3	%

Interest expense for the years ended June 30, 2008 and 2007 was $5.5 million and $7.7 million, respectively, primarily reflecting interest paid on borrowings on the Company’s revolving line of credit and long-term debt. The improvement in interest expense for the current fiscal year is primarily attributable to lower average debt balances, and to a lesser extent, lower interest rates.

The Company generates interest income on longer-term interest bearing receivables and to a lesser extent interest earned on cash and cash-equivalent balances on hand. However, the increase in interest income in the current fiscal year is primarily attributable to an increase on interest bearing receivables in comparison to the prior fiscal year.

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Net foreign exchange losses were $0.2 million for both fiscal years ended June 30, 2008 and 2007, respectively. Foreign exchange losses for the current fiscal year are similar to the prior fiscal year and are primarily the result of fluctuations in the value of the Euro versus the British Pound, and to a lesser extent, the U.S. Dollar versus other currencies. The Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure. The Company’s foreign exchange policy prohibits entering into speculative transactions.

Provision for Income Taxes

Income tax expense was $34.6 million and $26.0 million for the fiscal years ended June 30, 2008 and 2007, respectively, reflecting an effective income tax rate of 38.3% and 37.8%, respectively. The increase in the effective tax rate is largely due to higher state tax expense.

22

Minority Interest in Income of Consolidated Subsidiaries

In the prior fiscal year, the Company recorded minority interest income associated with certain minority shareholders. Effective July 1, 2007, the Company owns 100% of its consolidated subsidiaries.

Net Income

The following table summarizes the Company’s net income for the fiscal year ended June 30^th:

							Percentage Change		Percentage of Net Sales
	2008		2007		Difference				2008		2007
	(In thousands)
Net income	$	55,632	$	42,626	$	13,006	30.5	%	2.6	%	2.1	%

Net income for the current fiscal year ended June 30, 2008 was $55.6 million, a $13 million increase over the prior fiscal year period. The increase in net income and net income expressed as a percentage of net sales is attributable to the changes in operating profits discussed previously.

23

Comparison of Fiscal Years Ended June 30, 2007 and 2006

Net Sales

The following tables summarize the Company’s net sales results (net of inter-segment sales):

Product Category
	2007		2006		Difference		Percentage Change
		(In thousands)
AIDC, POS and security products	$	1,200,497	$	988,338	$	212,159	21.5	%
Communications products		786,430		677,262		109,168	16.1	%
Net Sales	$	1,986,927	$	1,665,600	$	321,327	19.3	%
Geographic Segments
	2007		2006		Difference		Percentage Change
	(In thousands)
North American distribution	$	1,669,648	$	1,441,791	$	227,857	15.8	%
International distribution		317,279		223,809		93,470	41.8	%
Net Sales	$	1,986,927	$	1,665,600	$	321,327	19.3	%

North American Distribution

North American distribution sales include sales to technology resellers in the United States and Canada from the Company’s Memphis, Tennessee distribution center. Sales to technology resellers in Canada account for less than 5% of total net sales for the fiscal years ended June 30, 2007 and 2006. The 15.8% increase in North American distribution sales for the year ended June 30, 2007, as compared to the same period in the prior year, was due to strong AIDC and communication sales.

Sales of the AIDC, POS and security product categories for the North America distribution segment increased 15.5% as compared to the prior year. The ScanSource selling unit benefited from the AIDC business’s gain in market share. Training, education and marketing investments for the ScanSource Security Distribution sales unit also contributed to the gain in market share.

Sales of communications products increased 16.1% as compared to the prior year. The communications business included increased market share for T2 Supply, a sales unit acquired on July 3, 2006. The majority of the increase in the communications products business was due to the inclusion of T2 Supply in this year’s results. Both Catalyst Telecom and Paracon, which distribute communication products, experienced sales growth due to increased market share in certain lines and the addition of new vendors.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource selling unit. Sales for the overall international segment increased approximately 41.8% or $93.5 million as compared to the prior year. The increase in sales was primarily attributable to gain in market share in Europe and Latin America. Strong sales growth for the year ended June 30, 2007 was experienced in the United Kingdom, France, Germany, Mexico, Argentina and Chile compared to the prior year.

24

Sales during the year ended June 30, 2007 were favorably impacted by foreign exchange fluctuations of $16.9 million. Without the foreign exchange fluctuations, the increase for the year would have been 34.2% or $76.6 million. Although management cannot forecast the future direction of foreign exchange rate movements, if significant unfavorable changes in exchange rates occur, net sales of the segment could be adversely affected.

Gross Profit

The following table summarizes the Company’s gross profit:

									Percentage of Net Sales
	2007		2006		Difference		Percentage Change		2007		2006
	(In thousands)
North American distribution	$	169,627	$	138,168	$	31,459	22.8	%	10.2	%	9.6	%
International distribution		41,045		30,184		10,861	36.0	%	12.9	%	13.5	%
Gross Profit	$	210,672	$	168,352	$	42,320	25.1	%	10.6	%	10.1	%

North American Distribution

Gross profit for the North American distribution segment increased $31.5 million for the fiscal year ended June 30, 2007 as compared to the prior fiscal year. The increase in gross profit for the year ended June 30, 2007 is a result of increased sales volume of the segment.

Gross profit as a percentage of net sales for the North American distribution segment increased to 10.2% of sales for fiscal year 2007 as compared to 9.6% of sales for the prior fiscal year. The increase from the prior year is due to a favorable product and customer mix, including higher services revenues, and to the attainment of additional rebates from vendor programs.

International Distribution

Gross profit for the international distribution segment increased $10.9 million for the fiscal year ended June 30, 2007 as compared to the prior fiscal year. The increase was primarily due to increased distribution volume.

Gross profit, as a percentage of net sales, which is typically greater than the North American distribution segment, decreased from the prior year. Gross margin decreased due to the sales mix of larger deals with lower value-add requirements, primarily in Europe. In Latin America, strategic deals in an increasingly competitive market resulted in lower margins.

Operating Expenses

The following table summarizes the Company’s operating expenses:

									Percentage of Net Sales
	2007		2006		Difference		Percentage Change		2007		2006
	(In thousands)
Fiscal year ended	$	135,339	$	105,042	$	30,297	28.8	%	6.8	%	6.3	%

25

For the year ended June 30, 2007, operating expenses increased compared to the prior year due principally to special committee expenses of $9.9 million related to the Company’s stock option investigation, incremental, including T2 Supply, increases in employee headcount and related benefits of approximately $11.5 million, the recognition of higher bad debt expense of approximately $6.2 million, and amortization expense for T2 Supply intangible assets of $1.9 million.

Operating expenses, as a percentage of sales, increased from the prior year. Greater economies of scale in the current year were offset by special committee expenses referred to above. Pursuant to achieving internal goals during the year ended June 30, 2007, the Company recorded profit-sharing expense of $5.5 million compared to $5.0 million for the year ended June 30, 2006.

The Company continues to invest in North America customer training and development programs for new technologies and vertical marketing (such as converged communications and IMPACT NOW), its electronic security business, and additional resources for its rapidly growing T2 Supply business. In addition, the Company continues to invest in Europe and Latin America due to its growth potential in those markets. In Europe, the Company has expanded geographically, increased marketing, and increased employee headcount. With respect to its Latin American market, the Company has increased employee headcount in Miami and Mexico City in order to serve an expanding customer base and continues to offer VAR education and training events.

Operating Income

The following table summarizes the Company’s operating income:

									Percentage of Net Sales
	2007		2006		Difference		Change		2006		2005
	(In thousands)
Fiscal year ended	$	75,333	$	63,310	$	12,023	19.0	%	3.8	%	3.8	%

Operating income increased 19.0% or $12.0 million for the year ended June 30, 2007 as compared to the prior year. The increase was a result of increased sales volume, improved gross profit margins, and greater economies of scale in operating expenses.

Operating income as a percentage of net sales remained consistent compared to the prior year.

Total Other Expense (Income)

The following table summarizes the Company’s total other expense (income):

												Percentage of Net Sales
	2007			2006			Difference			Change		2007		2006
	(In thousands)
Interest expense	$	7,689		$	2,187		$	5,502		251.6	%	0.4	%	0.1	%
Interest income		(885	)		(567	)		(318	)	56.1	%	0.0	%	0.0	%
Net foreign exchange losses (gains)		190			115			75		65.2	%	0.0	%	0.0	%
Other, net		(334	)		(58	)		(276	)	475.9	%	0.0	%	0.0	%
Total other expense (income)	$	6,660		$	1,677		$	4,983		297.1	%	0.3	%	0.1	%

26

Interest expense for the years ended June 30, 2007 and 2006 was $7.7 million and $2.2 million, respectively, reflecting interest paid on borrowings on the Company’s line of credit and long-term debt. Interest expense for the current year increased primarily due to higher average debt balances as a result of the acquisition of T2 Supply at the beginning of the fiscal year and to additional working capital requirements financed through an increase in the revolving credit facility.

Interest income for the year ended June 30, 2007 increased by approximately $0.3 million over the prior year, principally as a result of higher interest-bearing receivables.

Foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Net foreign exchange losses were $0.2 million and $0.1 million for the years ended June 30, 2007 and 2006, respectively. The change in foreign exchange gains and losses for the year ended June 30, 2007 as compared to the prior year are primarily the result of fluctuations in the value of the Euro versus the British Pound, and to a lesser extent, the U.S. Dollar versus other currencies. The Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure. The Company’s foreign exchange policy prohibits entering into speculative transactions.

Provision For Income Taxes

Income tax expense was $26.0 million and $21.6 million for the years ended June 30, 2007 and 2006, respectively, reflecting an effective income tax rate of 37.8% and 35.0%, respectively. The increase in the tax rate is attributable to the prior year utilization of foreign net operating loss carryforwards.

Minority Interest in Income of Consolidated Subsidiaries

The Company recorded $60,000 and $225,000, respectively, of minority interest income in fiscal 2007 and 2006 for Netpoint’s minority shareholders. The decrease in minority interest income relates to the Company’s purchase of additional equity in Netpoint.

Net Income

The following table summarizes the Company’s net income:

									Percentage of Net Sales
	2007		2006		Difference		Change		2007		2006
	(In thousands)
Fiscal year ended	$	42,626	$	39,816	$	2,810	7.1	%	2.1	%	2.4	%

The increase in the amount of net income in 2007 from 2006 is attributable to the changes in operating profits discussed above. Net income as a percentage of net sales decreased primarily due to the lower tax rate in 2006 compared to 2007, special committee costs of $9.9 million in 2007, and higher interest expense of $5.5 million in 2007, all as discussed above.

Quarterly Results

The following tables set forth certain unaudited quarterly financial data. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments

27

(consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.

	Three Months Ended
	Fiscal 2008								Fiscal 2007
	June 30 2008		Mar. 31 2008		Dec. 31 2007		Sept. 30 2007		June 30 2007		Mar. 31 2007		Dec. 31 2006		Sept. 30 2006
	(In thousands, except per share data)
Net sales	$	554,030	$	514,420	$	553,344	$	553,691	$	524,285	$	492,678	$	473,734	$	496,230
Cost of goods sold		495,432		462,701		494,167		495,567		469,265		441,641		420,957		444,392
Gross profit	$	58,598	$	51,719	$	59,177	$	58,124	$	55,020	$	51,037	$	52,777	$	51,838
Net income	$	14,468	$	11,028	$	15,450	$	14,686	$	11,303	$	10,071	$	8,791	$	12,461
Weighted-average shares outstanding, basic		26,307		26,038		25,899		25,866		25,843		25,770		25,749		25,729
Weighted-average shares outstanding, assuming dilution		26,549		26,423		26,330		26,276		26,258		26,194		26,236		26,213
Net income per common share, basic	$	0.55	$	0.42	$	0.60	$	0.57	$	0.44	$	0.39	$	0.34	$	0.48
Net income per common share, assuming dilution	$	0.54	$	0.42	$	0.59	$	0.56	$	0.43	$	0.38	$	0.34	$	0.48

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, inventory reserves to reduce inventories to the lower of cost or market, and vendor incentives. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions, however, management believes that its estimates, including those for the above-described items are reasonable and that the actual results will not vary significantly from the estimated amounts. For further discussion of our significant accounting policies, refer to Note 2 of Notes to Consolidated Financial Statements.

28

Revenue Recognition

The Company recognizes revenue once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured. A provision for estimated losses on returns is recorded at the time of sale based on historical experience.

The Company has service revenue associated with configuration and marketing, which is recognized when the work is complete and all obligations are substantially met. The Company also sells third-party services, such as maintenance contracts. Since the Company is acting as an agent for these services, revenue is recognized net of cost at the time of sale. Revenue from multiple element arrangements is allocated to the various elements based on the relative fair value of the elements, and each revenue cycle is considered a separate accounting unit with recognition of revenue based on the criteria met for the individual element of the multiple deliverables.

Allowances for Trade and Notes Receivable

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. A provision for estimated losses on returns and allowances is recorded at the time of sale based on historical experience.

Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. An estimate is made of the market value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than the estimated amounts, reserves may be reduced.

Vendor Programs

The Company receives incentives from vendors related to cooperative advertising allowances, volume rebates and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the vendors. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the vendor. Vendors generally require that we use their cooperative advertising allowances exclusively for advertising or other marketing programs. Incentives received from vendors for specifically identified incremental cooperative advertising programs are recorded as adjustments to selling, general and administrative expenses. Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a

29

Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”) requires that a portion of these vendor funds in excess of our costs be reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of goods sold when the related inventory is sold.

The Company records unrestricted volume rebates received as a reduction of inventory and as a reduction of the cost of goods sold when the related inventory is sold. Amounts received or receivable from vendors that are not yet earned are deferred in the consolidated balance sheet. In addition, the Company may receive early payment discounts from certain vendors. The Company records early payment discounts received as a reduction of inventory and recognizes the discount as a reduction of cost of goods sold when the related inventory is sold. EITF 02-16 requires management to make certain estimates of the amounts of vendor incentives that will be received. Actual recognition of the vendor consideration may vary from management estimates based on actual results.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, and, to a lesser extent, borrowings under the subsidiary’s line of credit, and proceeds from the exercise of stock options.

The Company’s cash and cash equivalent balance totaled $15.2 million at June 30, 2008 compared to $1.9 million at June 30, 2007. The Company’s working capital increased from $353 million at June 30, 2007 to $369 million at June 30, 2008. The increase in working capital resulted primarily from a $13.4 million increase in cash and cash equivalents, a $10.2 million increase in trade and notes receivable, and an $8.1 million increase in inventory. This was offset somewhat by a $11.7 million increase in current liabilities, primarily accounts payable. The increases in working capital support the worldwide growth of the Company as allowed by our return on invested capital (ROIC) model.

The increase in the amount of trade accounts receivable is attributable to an increase in sales during the year. The number of days sales outstanding (DSO) in ending trade receivables decreased to 59 days at June 30, 2008 compared to 60 days at June 30, 2007. The improvement in DSO can reflect collection improvement in our operations as well as a favorable change in business unit sales mix, as certain of our domestic business units have higher DSO’s than others.

Inventory turnover increased to 6.9 times in fiscal 2008 from 6.7 times in fiscal 2007. This increase is largely attributable to higher sales in the current fiscal year and more diligent efforts in monitoring inventory levels.

Cash provided by operating activities was $62.9 million for the year ended June 30, 2008 compared to cash used in operating activities of $25.9 million for the year ended June 30, 2007. Fluctuations in cash provided by or used in operations is generally a function of the timing of inventory purchases and sales in combination with vendor payments and customer receipts. At June 30, 2008, our accounts receivable and inventory balances were not significantly higher than those respective balances at June 30, 2007, which had a favorable impact on our operating cash flows for the current fiscal year. In addition, the Company also generated approximately $13 million of additional net income than in the comparative period.

Cash used in investing activities for the fiscal year ended June 30, 2008 was $11.4 million, compared to $55.1 million in the prior fiscal year. Cash used for business acquisitions in the current year included $8.2 million for MTV Telecom in April 2008, $1.2 million for PC4 in January 2008, and $1.1 million for the remaining outstanding shares of Netpoint. In the prior fiscal year, the Company

30

completed the purchase of T2 Supply, Inc., for $50.6 million. T2 Supply was later combined with Paracon to form the ScanSource Communications sales unit. The majority of the $7 million of capital expenditures incurred in the current fiscal year relate to equipment and leasehold improvements associated with the Company’s new North American distribution facility located in Southaven, Mississippi that was formally opened in January 2008. In connection with the relocation to this new facility, the Company’s previous North American distribution facility, which was located in Memphis, Tennessee, was sold in January 2008 for net proceeds of $6.1 million.

Cash used in financing activities was $38.6 million for the fiscal year ended June 30, 2008, compared to cash provided from financing activities of $79.0 million for the prior fiscal year period. As a result, at June 30, 2008, the Company’s interest bearing debt decreased to $64.3 million, compared to $111.2 million at June 30, 2007. The reduction in debt outstanding at June 30, 2008 is a function of the timing of various operating activities in the current fiscal year, as previously discussed. This resulted in significantly higher cash flow generated from operations that was applied to our outstanding debt balances. In addition, in the prior fiscal year, the Company increased its borrowings to finance the acquisition of T2 Supply in the quarter ended September 30, 2006. The Company also generated over $8.2 million of cash proceeds related to the exercise of stock options and remediation payments from executive officers in connection with the 2007 investigation by the Special Committee of our Board of Directors into our historical stock option grant practices. In the comparative prior fiscal year, the Company only received $1.1 million related to stock option exercises.

The Company has a revolving credit facility secured by the assets of its European operations and guaranteed by the Company. This facility was amended on May 14, 2008, to increase the borrowing limit to €6.0 million for the Company’s European operations. At June 30, 2008, the balance on this facility was €4.9 million or $7.6 million, and the effective rate of interest was 4.97%.

On January 2, 2008, the Company entered into a $25 million promissory note with a third party lender. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30 day London Interbank Offered Rate (“LIBOR”) plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment terms of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until fully paid. In any event, all principal and accrued interest will be due and payable on September 28, 2012. The note may be prepaid in whole or in part at any time without penalty. On January 4, 2008, the Company entered into an interest rate swap with a notional amount of $25 million and designated this instrument as a cash flow hedge of our exposure to variability in future cash flows associated with the $25 million note payable. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011.

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million subject to obtaining commitments for the incremental capacity from existing or new lenders. This revolving credit facility refinances and replaces the Company’s previous $180 million multi-currency revolving credit facility. The new facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable LIBOR rate or prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of

31

June 30, 2008 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. This agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The Company was in compliance with all covenants under the credit facility as of June 30, 2008.

The effective weighted average interest rate on the Company’s revolving credit facility as of June 30, 2008 was 4.55% and as of June 30, 2007 was 6.41%. The outstanding borrowings at June 30, 2008 were $27 million on a total commitment of $250 million, leaving approximately $223 million available for additional borrowings, as of June 30, 2008.

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s new Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allows for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The Company receives advances on this bond on an as needed basis to pay the ongoing costs of the project, not to exceed $6 million. The outstanding balance on this bond was $4.6 million as of June 30, 2008, and the effective interest rate was 3.31%.

The Company believes that its existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under the Company’s credit agreements, will provide sufficient resources to meet the Company’s present and future working capital and cash requirements for at least the next twelve months. The Company is in compliance with all material covenants or other requirements set forth in the credit agreements discussed above.

Commitments

At June 30, 2008, the Company had contractual obligations in the form of non-cancelable operating leases and debt, including interest payments (See Notes 7 and 12 to the consolidated financial statements) as follows (amounts in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		Greater than 5 Years
	(in thousands)
Principal debt payments	$	64,272	$	7,649	$	—	$	52,047	$	4,576
Non-cancelable operating leases(1)		30,493		4,379		8,648		6,625		10,841
Other(2)		—		—		—		—		—
Total obligations	$	94,765	$	12,028	$	8,648	$	58,672	$	15,417

(1) Amounts to be paid in future periods for real estate taxes, insurance, and other operating expenses applicable to the properties pursuant to the respective operating leases have been excluded from the table above as the amounts payable in future periods are generally not specified in the lease agreements and are dependent upon amounts which are not known at this time. Such amounts were not material in the current fiscal year.

(2) Amounts totaling $5.7 million of deferred compensation which are included in other non-current liabilities in our consolidated balance sheet as of June 30, 2008 have been excluded from the table above due to the uncertainty of the timing of the payment of these obligations, which are generally at the discretion of the individual employees or upon death of the former employee, respectively.

32

The Company has entered into written distribution agreements with substantially all of its major vendors. While the Company’s agreements with most of its vendors contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days notice.

The Company does not have any current liability for uncertain tax positions under FASB Interpretation No. (“FIN”) 48. The Company is not able to reasonably estimate the timing of the long-term payments, or the amount by which its liability will increase or decrease over time; therefore, the long-term portion of the Company’s FIN 48 liability of $2.0 million has not been included in the contractual obligations table (see Note 11 to the consolidated financial statements).

Backlog

The Company does not consider backlogs to be material to its business. Nearly all orders are filled within 24 hours of receipt.

Accounting Standards Recently Issued

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS”), No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, or (“SFAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the third quarter of fiscal 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 161 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51, or (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. Early adoption is prohibited.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or (“SFAS 159”), which requires companies to provide additional information regarding the effect of a company’s choice to use fair value on its earnings and to display the fair value of those assets and liabilities which the company has chosen to use on the face of the balance sheet. SFAS 159 is effective for the Company beginning July 1, 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its 2009 consolidated financial statements.

33

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of information. This statement is effective for the Company beginning July 1, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on its 2009 consolidated financial statements, however, additional disclosures about fair value will be required.

Impact of Inflation

The Company has not been adversely affected by inflation as technological advances and competition within specialty technology markets have generally caused prices of the products sold by the Company to decline. Management believes that any price increases could be passed on to its customers, as prices charged by the Company are not set by long-term contracts.

34

Quantitative and Qualitative Disclosures About Market Risks

The Company’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and transacting business in foreign currencies in connection with its foreign operations.

Interest Rate Risk

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks used to maintain liquidity and fund the Company’s business operations. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving line of credit, variable rate long term debt and subsidiary line of credit for the fiscal year ended June 30, 2008 would have resulted in an approximately $0.6 million increase or decrease, respectively, in pre-tax income.

To mitigate the risk of interest rate fluctuations associated with the Company’s variable rate long-term debt, the Company has implemented an interest rate risk management strategy that incorporates the use of an interest rate swap designated as a cash flow hedge to minimize the significant unplanned fluctuations in earnings caused by interest rate volatility. The Company’s use of derivative instruments has the potential to expose the Company to certain market risks including the possibility of (1) the Company’s hedging activities not being as effective as anticipated in reducing the volatility of the Company’s cash flows, (2) the counterparty not performing its obligations under the applicable hedging arrangement, (3) the hedging arrangement being imperfect or ineffective, or (4) the terms of the swap or associated debt may change. The Company seeks to lessen such risks by having established a policy to identify, control, and manage market risks which may arise from changes in interest rates, as well as limiting its counterparties to major financial institutions.

Foreign Currency Exchange Rate Risk

The Company is exposed to foreign currency risks that arise from its foreign operations in Canada, Mexico and Europe. These risks include the translation of local currency balances of foreign subsidiaries, inter-company loans with foreign subsidiaries and transactions denominated in non-functional currencies. These risks may change over time as business practices evolve and could have a material impact on the Company’s financial results in the future. In the normal course of business, foreign exchange risk is managed by using foreign currency forward contracts to hedge these exposures, as well as balance sheet netting of exposures. The Company’s Board of Directors has approved a foreign exchange hedging policy to minimize foreign currency exposure. The Company’s policy is to utilize financial instruments to reduce risks where internal netting cannot be effectively employed and not to enter into foreign currency derivative instruments for speculative or trading purposes. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currencies and enters into foreign exchange derivative contracts to minimize short-term currency risks on cash flows. The Company continually evaluates foreign exchange risk and may enter into foreign exchange transactions in accordance with its policy. Foreign currency gains and losses are included in other expense (income).

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked to market with changes in their values recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. At June 30, 2008, the Company’s currency forward contracts outstanding were immaterial. The Company does not utilize financial instruments for trading or other speculative purposes.

35

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of ScanSource, Inc.

We have audited the accompanying consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ScanSource, Inc. and subsidiaries at June 30, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ScanSource, Inc.’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 27, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 27, 2008

36

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of ScanSource, Inc.

We have audited ScanSource, Inc.’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ScanSource, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ScanSource, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2008 of ScanSource, Inc. and subsidiaries and our report dated August 27, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 27, 2008

37

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share information)

	June 30, 2008		June 30, 2007
Assets
Current assets:
Cash and cash equivalents	$	15,224	$	1,864
Trade and notes receivable:
Trade, less allowance of $15,842 at June 30, 2008 and $13,342 at June 30, 2007		360,154		349,961
Other receivables		8,052		6,755
		368,206		356,716
Inventories		280,077		272,012
Prepaid expenses and other assets		5,556		10,444
Deferred income taxes		11,428		12,102
Total current assets		680,491		653,138
Property and equipment, net		22,420		26,781
Goodwill		36,121		29,361
Other assets, including identifiable intangible assets		33,174		29,168
Total assets	$	772,206	$	738,448
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt	$	—	$	200
Short-term borrowings		7,649		3,490
Trade accounts payable		265,284		256,883
Accrued expenses and other liabilities		34,337		35,254
Income taxes payable		4,585		4,356
Total current liabilities		311,855		300,183
Long-term debt		29,576		17,216
Borrowings under revolving credit facility		27,047		90,314
Other long-term liabilities		7,975		5,475
Total liabilities		376,453		413,188
Minority interest		—		516
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued		—		—
Common stock, no par value; 45,000,000 shares authorized, 26,349,520 and 25,855,724 shares issued and outstanding at June 30, 2008 and June 30, 2007, respectively		96,097		83,653
Retained earnings		290,134		234,502
Accumulated other comprehensive income		9,522		6,589
Total shareholders' equity		395,753		324,744
Total liabilities and shareholders' equity	$	772,206	$	738,448

See accompany notes to consolidated financial statements

38

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

Years Ended June 30, 2008, 2007 and 2006

(In thousands, except per share data)

	2008			2007			2006
Net sales	$	2,175,485		$	1,986,927		$	1,665,600
Cost of goods sold		1,947,867			1,776,255			1,497,248
Gross profit		227,618			210,672			168,352
Operating expenses:
Selling, general and administrative expenses		133,653			135,339			105,042
Operating income		93,965			75,333			63,310
Other expense (income):
Interest expense		5,471			7,689			2,187
Interest income		(1,512	)		(885	)		(567	)
Other, net		(212	)		(144	)		57
Total other expense		3,747			6,660			1,677
Income before income taxes and minority interest		90,218			68,673			61,633
Provision for income taxes		34,586			25,987			21,592
Income before minority interest		55,632			42,686			40,041
Minority interest in income of consolidated subsidiaries, net of income taxes of $0, $36, and $101 at June 30, 2008, 2007, and 2006, respectively		—			60			225
Net income	$	55,632		$	42,626		$	39,816
Per share data:
Net income per common share, basic	$	2.13		$	1.65		$	1.56
Weighted-average shares outstanding, basic		26,098			25,773			25,491
Net income per common share, diluted	$	2.10		$	1.63		$	1.53
Weighted-average shares outstanding, diluted		26,445			26,213			26,034

See accompanying notes to consolidated financial statements

39

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended June 30, 2008, 2007 and 2006

(In thousands, except share data)

	Common Stock (Shares)	Common Stock (Amount)			Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance at June 30, 2005	25,330,152	$	69,668		$	152,061	$	3,484	$	225,213
Comprehensive Income:
Net income	—		—			39,816		—		39,816
Foreign currency translation adjustment	—		—					1,133		1,133
Total comprehensive income										40,949
Exercise of stock options	395,062		2,673			—		—		2,673
Share based compensation	—		3,593			—		—		3,593
Tax benefit of deductible compensation arising from exercise of stock options	—		981			—		—		981
Balance at June 30, 2006	25,725,214	$	76,915		$	191,876	$	4,618	$	273,409
Comprehensive Income:
Net income	—		—			42,626		—		42,626
Foreign currency translation adjustment	—		—			—		1,971		1,971
Total comprehensive income										44,597
Exercise of stock options	130,510		1,125			—		—		1,125
Share based compensation	—		3,642			—		—		3,642
Tax benefit of deductible compensation arising from exercise of stock options	—		1,971			—		—		1,971
Balance at June 30, 2007	25,855,724	$	83,653		$	234,502	$	6,589	$	324,744
Comprehensive Income:
Net income	—		—			55,632		—		55,632
Unrealized gain on hedged transaction, net of tax of $41	—		—			—		66		66
Foreign currency translation adjustment	—		—			—		2,867		2,867
Total comprehensive income										58,565
Exercise of stock options and shares issued under share-based compensation plans	493,796		7,487			—		—		7,487
Share based compensation	—		4,300			—		—		4,300
Tax benefit of deductible compensation arising from exercise of stock options	—		364			—		—		364
Consideration received from certain officers related to remediation activities (see Note 9)	—		751			—		—		751
Reclassification of additional-paid- in-capital related to remediation activities (see Note 9)	—		(458	)		—		—		(458	)
Balance at June 30, 2008	26,349,520	$	96,097		$	290,134	$	9,522	$	395,753

See accompanying notes to consolidated financial statements

40

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30, 2008, 2007, and 2006

(In thousands)

	2008			2007			2006
Cash flows from operating activities:
Net income	$	55,632		$	42,626		$	39,816
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		4,652			4,851			5,566
Amortization of intangible assets		2,475			2,079			200
Allowance for accounts and notes receivable		6,504			8,858			2,702
Share-based compensation and restricted stock		4,904			3,642			3,716
Asset impairment		202			148			102
Deferred income taxes		(94	)		992			(5,802	)
Excess tax benefits from share-based payment arrangements		(364	)		(1,971	)		(982	)
Minority interest in income of subsidiaries		—			60			225
Changes in operating assets and liabilities, net of acquisitions:
Trade and notes receivable		(3,056	)		(45,172	)		(85,005	)
Other receivables		(9,774	)		(1,158	)		942
Inventories		85			(21,138	)		(63,604	)
Prepaid expenses and other assets		5,276			(8,126	)		1,316
Other noncurrent assets		(2,692	)		(2,471	)		4,320
Trade accounts payable		629			(16,088	)		97,125
Accrued expenses and other liabilities		(267	)		7,044			9,747
Income taxes payable		(1,223	)		(123	)		2,823
Net cash provided by (used in) operating activities		62,889			(25,947	)		13,207
Cash flows used in investing activities:
Capital expenditures		(6,982	)		(4,542	)		(9,431	)
Net proceeds from sale of property and equipment		6,100			—			—
Cash paid for business acquisitions, net of cash acquired		(10,530	)		(50,585	)		(1,348	)
Net cash used in investing activities		(11,412	)		(55,127	)		(10,779	)
Cash flows from financing activities:
Increases (decreases) in short-term borrowings, net		3,797			3,309			(4,478	)
(Payments) advances on revolving credit, net of expenses		(63,137	)		59,800			(4,343	)
Exercise of stock options & Section 16 remediation		8,238			1,125			2,673
Excess tax benefits from share-based payment arrangements		364			1,971			982
Proceeds from issuance of long-term debt		25,000			13,000			0
Repayment of long-term debt		(12,840	)		(211	)		(1,982	)
Net cash (used in) provided by financing activities		(38,578	)		78,994			(7,148	)
Effect of exchange rate changes on cash and cash equivalents		461			113			(58	)
Increase (decrease) in cash and cash equivalents		13,360			(1,967	)		(4,778	)
Cash and cash equivalents at beginning of period		1,864			3,831			8,609
Cash and cash equivalents at end of period	$	15,224		$	1,864		$	3,831
Supplemental disclosure of cash flow information:
Interest paid during the year	$	6,885		$	6,229		$	2,159
Income taxes paid during the year	$	29,580		$	30,228		$	22,614

See accompanying notes to consolidated financial statements

41

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

(1) Business Description

ScanSource, Inc. (the “Company”) is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony, and communications products through its ScanSource Communications unit; and electronic security products and wireless infrastructure products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource Latin American and European sales units. On April 4, 2008, the Company announced it had expanded its communications business internationally through the acquisition of MTV Telecom (Distribution) PLC, (“MTV Telecom”), a UK-based distributor of voice and data solutions.

(2) Summary of Significant Accounting Policies and Accounting Standards Recently Issued

Consolidation Policy

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Minority Interest

Minority interest represents that portion of the net equity of majority-owned subsidiaries of the Company held by minority shareholders. The minority shareholders’ share of the subsidiaries’ income or loss is listed separately in the Consolidated Income Statements. Effective July 1, 2007, the Company owns 100% of Netpoint International, Inc. (“Netpoint”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable and inventory reserves. Management bases its estimates on assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different

42

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.

The following significant accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:

(a) Allowances for Trade and Notes Receivable

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. A provision for estimated losses on returns and allowances is recorded at the time of sale based on historical experience.

(b) Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. An estimate is made of the market value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than the estimated amounts, reserves may be reduced.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the accompanying consolidated financial statements.

Stock Split

Effective June 5, 2006, the Board of Directors of the Company approved a two-for-one stock split of the common stock effected in the form of a 100% common stock dividend. All shares and per share amounts have been retroactively adjusted to reflect the stock split.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Checks released but not yet cleared at the Company’s bank of $25.9 million and $45.7 million as of June 30, 2008 and 2007, respectively, are included in accounts payable.

43

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Concentration of Credit Risk

The Company sells its products to a large base of value-added resellers throughout North America, Latin America (including Mexico) and Europe. The Company performs ongoing credit evaluations of its customers’ financial condition. In certain cases, the Company will accept tangible assets as collateral to increase the trade credit of its customers. No single customer accounted for more than 6% of the Company’s net sales for fiscal 2008, 2007, or 2006.

The Company has established arrangements with certain customers for longer term financing. The Company accounts for these arrangements by recording them at their historical cost less specific allowances at balance sheet dates. Interest income is recognized in the period earned and is recorded as interest income in the Consolidated Income Statement.

Derivative Financial Instruments

The Company uses derivative instruments to manage certain exposures related to foreign currency as well as changes in interest rates as a result of our borrowing activities. We record all derivative instruments as either assets or liabilities in the balance sheet at fair value. The Company currently does not use derivative financial instruments for trading or speculative purposes.

The Company’s foreign currency exposure results from purchasing and selling internationally in several foreign currencies. In addition, the Company has foreign currency risk related to debt that is denominated in currencies other than the U.S. Dollar. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments or multi-currency borrowings. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items. Derivative financial instruments related to foreign currency exposure are accounted for on an accrual basis with gains or losses on these contracts recorded in income in the period in which their value changes, with the offsetting entry for unsettled positions reflected in either other assets or other liabilities. These contracts are generally for a duration of 90 days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked-to-market with changes in their fair value recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily by British Pounds, Euros, and Canadian Dollars. To date, the activity and outstanding contracts related to these instruments have not been material.

During the current fiscal year, the Company entered into an interest rate swap and designated this instrument as a hedge of the cash flows on certain variable rate debt. To the extent the derivative instrument is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative instrument will not be included in current earnings, but will be reported as other comprehensive income (loss). The ineffective portion, if any, will be recorded as an adjustment to earnings.

44

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Investments

The Company has investments that are held in a grantor trust formed by the Company related to the ScanSource, Inc. Nonqualified Deferred Compensation Plan. The Company has classified these investments as trading securities and they are recorded at fair market value with unrealized gains and losses included in the accompanying Consolidated Income Statements. The Company’s obligations under this deferred compensation plan change in concert with the performance of the investments. The fair value of these investments and the corresponding deferred compensation obligation was $5.7 million and $4.3 million as of June 30, 2008 and June 30, 2007, respectively. These investments are classified within other non-current assets in the Consolidated Balance Sheets. The deferred compensation obligation is classified within other long-term liabilities.

Inventories

Inventories (consisting entirely of finished goods) are stated at the lower of cost (first-in, first-out method) or market.

Vendor Programs

The Company receives incentives from vendors related to cooperative advertising allowances, volume rebates and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the vendors. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the vendor. Vendors generally require that we use their cooperative advertising allowances exclusively for advertising or other marketing programs. Incentives received from vendors for specifically identified incremental cooperative advertising programs are recorded as adjustments to selling, general and administrative expenses. Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”) requires that the portion of these vendor funds in excess of our costs be reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of products sold when the related inventory is sold.

The Company records unrestricted volume rebates received as a reduction of inventory and as a reduction of the cost of goods sold when the related inventory is sold. Amounts received or receivable from vendors that are not yet earned are deferred in the Consolidated Balance Sheet. In addition, the Company may receive early payment discounts from certain vendors. The Company records early payment discounts received as a reduction of inventory and recognizes the discount as a reduction of cost of goods sold when the related inventory is sold. EITF 02-16 requires management to make certain estimates of the amounts of vendor incentives that will be received. Actual recognition of the vendor consideration may vary from management estimates based on actual results.

45

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Product Warranty

The Company’s vendors generally provide a warranty on the products distributed by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. In one product line, the Company offers certain warranty service programs and records a provision for estimated service warranty costs at the time of sale, adjusting periodically to reflect the actual experience. To date, neither warranty expense nor the accrual for warranty costs has been material to the Company’s consolidated financial statements. For all other product lines, the Company does not independently provide a warranty on the products it distributes; however, to maintain customer relations, the Company facilitates returns of defective products from the Company’s customers by accepting for exchange, with the Company’s prior approval, most defective products within 30 days of invoicing.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 10 years for furniture, equipment and computer software, 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.

Goodwill

The Company accounts for recorded goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which revised the standards of accounting for goodwill, by replacing the amortization of these assets with the requirement that they are reviewed annually for impairment, or more frequently if impairment indicators exist. See Note 6, “Goodwill and Other Identifiable Intangible Assets” for a discussion of the annual goodwill impairment test.

Intangible Assets

Intangible assets consist of customer relationships, debt issue costs, trade names, trademarks, and non-compete agreements. Customer relationships are amortized using the straight-line method over their estimated useful lives, which range from 5 to 15 years. Debt issue costs are amortized over the term of the credit facility. Trade names and trademarks are amortized over a period ranging from 1 to 2 years. Non-compete agreements are amortized over their contract life. These assets are included in other assets and are shown in detail in Note 6, “Goodwill and Other Identifiable Intangible Assets”.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Tests for recoverability of a long-lived asset to be held and used are measured by comparing the carrying amount of the long-lived asset to the sum of the estimated future

46

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows we use projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. If it is determined that a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value.

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and subsidiary lines of credit approximate fair value based upon either short maturities or variable interest rates of these instruments.

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.

Revenue Recognition

Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured. A provision for estimated losses on returns is recorded at the time of sale based on historical experience.

The Company has service revenue associated with configuration and marketing, which is recognized when the work is complete and all obligations are substantially met. The Company also sells third-party services, such as maintenance contracts. Since the company is acting as an agent for these services, revenue is recognized net of cost at the time of sale. Revenue from multiple element arrangements is allocated to the various elements based on the relative fair value of the elements, and each revenue cycle is considered a separate accounting unit with recognition of revenue based on the criteria met for the individual element of the multiple deliverables.

Shipping Revenue and Costs

Shipping revenue is included in net sales and related costs are included in cost of goods sold. Shipping revenue for the years ended June 30, 2008, 2007 and 2006 was approximately $11.8 million, $11.1 million, and $8.6 million, respectively.

47

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Advertising Costs

The Company defers advertising related costs until the advertising is first run in trade or other publications, or in the case of brochures, until the brochures are printed and available for distribution. Advertising costs, included in marketing costs, after vendor reimbursement, were not significant in any of the three years ended June 30, 2008. Deferred advertising costs at June 30, 2008 and 2007 were not significant.

Foreign Currency

The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income. The assets and liabilities of these foreign entities are translated into U.S. Dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period. Foreign currency transactional and re-measurement gains and losses are included in other expense (income) in the Consolidated Income Statement. Such amounts are not significant to any of the periods presented.

Income Taxes

Income taxes are accounted for under the liability method. Deferred income taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes, (“SFAS 109”), Federal income taxes are not provided on the undistributed earnings of foreign subsidiaries because it has been the practice of the Company to reinvest those earnings in the business outside the United States. Effective July 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS 109, or (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. See Note 11 for more information on the Company’s adoption of the interpretation.

Share-Based Payment

The Company accounts for share-based compensation using the provisions of FASB Statement No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”) which requires the recognition of the fair value of share-based compensation. Under the fair value recognition provisions of SFAS No. 123(R), share-based compensation is estimated at the grant date based on the fair value of the awards expected to vest and is recognized as expense ratably over the requisite service period of the award.

Comprehensive Income

SFAS 130, Reporting Comprehensive Income, defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events

48

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

and circumstances from non-owner sources. The primary components of comprehensive income for the Company include net income, foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries, and unrealized gains and losses on the Company’s hedged transactions, net of tax.

At June 30, 2008, 2007, and 2006, accumulated other comprehensive income comprised the following:

	Fiscal Year Ended June 30,
	2008	2007	2006
	(in thousands)
Currency translation adjustment, net	9,456	6,589	4,618
Unrealized gain on interest rate swap, net (Note 8)	66	—	—
Accumulated other comprehensive income	9,522	6,589	4,618

Accounting Standards Recently Issued

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, or (“SFAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the third quarter of fiscal 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 161 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51, or (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also

49

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. Early adoption is prohibited.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or (“SFAS 159”), which requires companies to provide additional information regarding the effect of a company’s choice to use fair value on its earnings and to display the fair value of those assets and liabilities which the company has chosen to use on the face of the balance sheet. SFAS 159 is effective for the Company beginning July 1, 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its 2009 consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of information. This statement is effective for the Company beginning July 1, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on its 2009 consolidated financial statements, however, additional disclosures about fair value measurements will be required.

50

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

(3) Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.

	Net Income		Shares	Per Share Amount
	(In thousands, except per share data)
2008:
Income per common share, basic	$	55,632	26,098	$	2.13
Effect of dilutive stock options		—	347
Income per common share, assuming dilution	$	55,632	26,445	$	2.10
2007:
Income per common share, basic	$	42,626	25,773	$	1.65
Effect of dilutive stock options		—	440
Income per common share, assuming dilution	$	42,626	26,213	$	1.63
2006:
Income per common share, basic	$	39,816	25,491	$	1.56
Effect of dilutive stock options		—	543
Income per common share, assuming dilution	$	39,816	26,034	$	1.53

For the years ended June 30, 2008, 2007 and 2006, there were 888,000, 581,000 and 424,000 weighted average shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

(4) Property and Equipment

Property and equipment is comprised of the following:

	June 30,
	2008			2007
	(In thousands)
Land	$	2,261		$	3,133
Buildings and leasehold improvements		14,719			22,278
Computer software and equipment		12,532			12,009
Furniture, fixtures and equipment		28,787			26,201
		58,299			63,621
Less accumulated depreciation		(35,879	)		(36,840	)
	$	22,420		$	26,781

51

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

During the current fiscal year, the Company relocated its North American distribution center from Memphis, Tennessee to its new location in Southaven, Mississippi, allowing for substantially expanded warehousing capacity. In January 2008, the Company sold the Memphis, Tennessee facility for cash proceeds of $6.1 million, net of expenses, and an immaterial loss was recorded in connection with this sale.

(5) Acquisitions

In April 2008, the Company expanded its communications business internationally with the acquisition of MTV Telecom, a UK-based distributor of voice and data solutions. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values on the transaction date. This resulted in the recognition of $6.1 million of goodwill and $2 million of amortizable intangible assets related primarily to customer relationships and trademarks.

In March 2008, the Company purchased certain assets of PC 4, a wholesale distributor of point-of-sale (POS) hardware. In accordance with this acquisition, approximately $0.3 million of the purchase price was allocated to customer relationships.

Also in the current fiscal year, in accordance with the purchase agreement, the Company purchased the remaining outstanding shares of Netpoint. The Company has made payments of $1.1 million and $1.1 million related to this acquisition for the fiscal years ended June 30, 2008 and 2007, respectively. Effective July 1, 2007, the Company now owns 100% of this subsidiary.

On July 3, 2006, the Company entered into an agreement with SKC Communications Products, Inc. to purchase the assets of T2 Supply LLC (“T2 Supply”) for a cash payment of approximately $50 million. T2 Supply is a distributor of video conferencing and telephony products based in Lenexa, Kansas. T2 Supply provides its reseller customers technical support for the configuration of video conferencing and sound solutions, an extended warranty program, training, marketing, a customer resource website, and bridging services. The purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values on the transaction date, resulting in the recording of $13.8 million of goodwill and $20.6 million of amortizable intangible assets related primarily to customer lists and non-compete agreements. The valuation of the identifiable intangible assets acquired was based on management’s estimates using a valuation report prepared by a third party. All of the assets acquired relate to the North American distribution segment.

None of these acquisitions meet the conditions of a material business combination as defined by the Securities and Exchange Commission.

(6) Goodwill and Other Identifiable Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs its annual goodwill impairment test at the end of each fiscal year. In addition, the

52

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Company performs an impairment analysis for goodwill whenever indicators of impairment are present. This testing includes the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. During fiscal years 2008, 2007 and 2006, no impairment charge related to goodwill was recorded.

Changes in the carrying amount of goodwill for the years ended June 30, 2007 and 2008, by operating segment, are as follows:

	North American Distribution Segment		International Distribution Segment			Total
		(In thousands)
Balance as of June 30, 2006	$	6,259	$	8,145		$	14,404
Goodwill acquired during 2007		13,822		679			14,501
Fluctuations in foreign currencies		—		456			456
Balance as of June 30, 2007	$	20,081	$	9,280		$	29,361
Goodwill acquired during 2008		—		6,767			6,767
Fluctuations in foreign currencies		—		(7	)		(7	)
Balance as of June 30, 2008	$	20,081	$	16,040		$	36,121

In the fiscal year ending June 30, 2008, the Company’s goodwill balances increased due to the acquisition of MTV Telecom and the purchase of the remaining outstanding shares of Netpoint. For the fiscal year ended June 30, 2007, the increase in goodwill relates to the acquisition of T2 Supply and the purchase of an additional interest in Netpoint, in accordance with the purchase agreement.

53

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

The following table shows the Company identifiable intangible assets as of June 30, 2008 and 2007, respectively. These balances are included on the consolidated balance sheet within other assets:

	June 30, 2008						June 30, 2007
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(In thousands)
Amortized intangible assets:
Customer relationships	$	20,127	$	2,450	$	17,677	$	18,338	$	1,538	$	16,800
Debt issue costs		841		113		728		606		420		186
Trade names and trademarks		987		412		575		818		82		736
Non-compete agreements		1,785		1,190		595		1,785		595		1,190
Total	$	23,740	$	4,165	$	19,575	$	21,547	$	2,635	$	18,912

The weighted average amortization period for all intangible assets was approximately thirteen, thirteen, and four years for the years ended June 30, 2008, 2007 and 2006, respectively. Amortization expense for the years ended June 30, 2008, 2007 and 2006 was $2.5 million, $2.1 million, and $0.2 million, respectively. Estimated future amortization expense is as follows:

Year ended June 30,	Amortization Expense
2009	$	2,641
2010		1,650
2011		1,560
2012		1,560
2013		1,449
Thereafter		10,715
	$	19,575

(7) Short-term Borrowings and Long-term Debt

Short Term Borrowings

	June 30, 2008		June 30, 2007
	(In thousands)
Short-term borrowings	$	7,649	$	3,490

54

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

The Company has a €6.0 million secured revolving credit facility which was recently amended on May 14, 2008. This facility bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 0.50 per annum. The effective interest rate at June 30, 2008 was 4.97% and at June 30, 2007 was 4.86%. This facility is secured by the assets of our European operations and is guaranteed by ScanSource, Inc.

Revolving Credit Facility

	June 30, 2008		June 30, 2007
	(In thousands)
Revolving credit facility	$	27,047	$	90,314

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million subject to obtaining commitments for the incremental capacity from existing or new lenders. This revolving credit facility refinances and replaces the Company’s previous $180 million multi-currency revolving credit facility. The new facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable London Interbank Offered Rate (“LIBOR”) rate or prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of June 30, 2008 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. The new agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The agreement also has certain restrictive covenants that, among other things, place limitations on the payment of cash dividends. The Company was in compliance with all covenants under the credit facility as of June 30, 2008. This facility also contains certain subjective acceleration clauses, which, upon occurrence of certain events, may cause amounts due under the agreement to become immediately due and payable. The Company has no indication that it is in default of any such clauses and therefore has classified its debt based on the dates regular payments are due.

At June 30, 2008 the effective weighted average interest rate for the Company’s revolving line of credit facility was 4.55% and the outstanding borrowings were $27.0 million on a total commitment of $250 million, leaving $223.0 million available for additional borrowings.

At June 30, 2007 the Company had a multi-currency revolving credit facility with its bank group of $180 million that was replaced with the current facility, as previously discussed. This facility was entered into on July 16, 2004 and increased on April 20, 2007 to $180 million, with

55

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

an accordion feature that allowed the Company to unilaterally increase the availability to $200 million. The facility bore interest at either the 30-day LIBOR rate of interest on U.S. dollar borrowings or the 30, 60, 90 or 180-day LIBOR rate of interest on other currency borrowings. The interest rate was the appropriate LIBOR rate plus a rate varying from 0.75% to 1.75% tied to the Company’s funded debt to EBITDA ratio ranging from 0.00:1.00 to 2.50:1.00 and a fixed charge coverage ratio of not less than 1.50:1. At June 30, 2007, the effective weighted average interest rate was 6.41% and the outstanding borrowings were $90.3 million on a total commitment of $200 million, leaving $109.7 million available for additional borrowings. The facility was collateralized by domestic assets, primarily accounts receivable and inventory. The agreement contained other restrictive financial covenants, including among other things, total liabilities to tangible net worth ratio, capital expenditure limits, and a prohibition on the payment of dividends. As of June 30, 2007 the Company was in compliance with all covenants under the credit facility. On February 14, 2007, the facility was amended to permit the Company to redeem shares of its capital stock so long as the amount paid in connection with the redemptions did not exceed $2 million during any fiscal year.

At June 30, 2007, Netpoint, doing business as ScanSource Latin America, had an asset-based line of credit with a bank that was due on demand and had a borrowing limit of $1 million. The facility was renewed in January 2007, and was scheduled to mature on January 31, 2008. The facility was collateralized by accounts receivable and eligible inventory, and contained a restrictive covenant which required an average deposit of $50,000 with the bank. The Company had guaranteed 92% of the balance on the line as of June 30, 2007, while the remaining balance was guaranteed by Netpoint’s minority shareholder. The facility bore interest at the bank’s prime rate minus one percent. At June 30, 2007, the effective interest rate was 7.25%. At June 30, 2007 there were no outstanding balances and outstanding standby letters of credit totaled $40,000, leaving $960,000 available for borrowings.

56

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Long Term Debt

Long-term debt consists of the following at June 30, 2008 and 2007:

	June 30, 2008		June 30, 2007
	(In thousands)
Industrial Development Revenue Bond, monthly payments of interest only, 3.31% variable interest rate at June 30, 2008 and maturing in fiscal 2033.	$	4,576	$	—
Unsecured note payable to a bank, monthly payments of interest only, 3.13% variable interest rate at June 30, 2008 and maturing in fiscal 2013.		25,000		—
Unsecured note payable to a bank, monthly payments of interest Only. Extinguished on December 31, 2007.		—		13,000
Note payable to a bank, secured by distribution center land and building. Extinguished on September 28, 2007.		—		4,416
		29,576		17,416
Less current portion		—		200
Long-term portion	$	29,576	$	17,216

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s new Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allows for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The Company receives advances on this bond on an as-needed basis to pay the ongoing costs of the project, not to exceed $6 million. As of June 30, 2008, the Company was in compliance with all covenants under this bond.

On January 2, 2008, the Company entered into a $25 million promissory note with a third party lender. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30 day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment terms of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until the principal balance is fully re-paid. In any event, all principal and accrued interest will be due and payable on September 28, 2012. This note may be prepaid in whole or in part at any time without penalty. Under the terms of this agreement, the Company has agreed not to encumber its headquarters’ property, except as permitted by the lender. As of June 30, 2008, the Company was in compliance with all covenants under this note payable.

57

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Scheduled maturities of the Company’s revolving credit facility and long-term debt at June 30, 2008 are as follows:

	Long-Term Debt
	(In thousands)
Fiscal year:
2009	$	—
2010		—
2011		—
2012		—
2013		52,047
Thereafter		4,576
Total principal payments	$	56,623

(8) Interest Rate Swap

On January 4, 2008, the Company entered into an interest rate swap with a notional amount of $25 million. The Company designated this interest rate swap as a cash flow hedge of our exposure to the variability in future cash flows attributable to interest payments of 30 day LIBOR plus a fixed spread of 0.65% due on the $25 million promissory note payable discussed in Note 7. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on the 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss).

The components of the cash flow hedge included in accumulated other comprehensive income in the Consolidated Statements of Shareholders’ Equity for the fiscal year ended June 30, 2008 and 2007, are as follows:

	Fiscal Year Ended June 30,
	2008			2007
	(In thousands)
Net interest expense recognized as a result of interest rate swap	$	(69	)	$	—
Unrealized gain in fair value of interest swap rates		135			—
Net increase in accumulated other comprehensive income, net of tax	$	66		$	—

58

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

(9) Share-Based Compensation

Share-Based Compensation Plans

The Company has awards outstanding from four share-based compensation plans (the 1993 Incentive Stock Option Plan, the 1997 Stock Incentive Plan, the 2002 Long-Term Incentive Plan, and the 2003 Director Plan), two of which (the 2002 Long-Term Incentive Plan and the 2003 Director Plan) are available for future grants. All of the Company’s share-based compensation plans are shareholder approved and it is the Company’s belief that such awards better align the interests of its employees and directors with those of its shareholders. Under the plans, the Company is authorized to award officers, employees, and non-employee members of the Board of Directors various share-based payment awards, including options to purchase common stock and restricted stock. As of June 30, 2008, there are 1.1 million and 0.1 million shares available for future grant under the 2002 Long-Term Incentive Plan and the 2003 Director Plan, respectively.

The Company accounts for its share-based compensation awards in accordance with SFAS 123(R), which was adopted by the Company on July 1, 2005. This standard requires all share-based compensation to be recognized in the income statement based on fair value and applies to all awards granted, modified, cancelled, or repurchased after the effective date. Total share-based compensation included as a component of selling, general, and administrative expense in our Consolidated Income Statement was as follows:

	Fiscal Year Ended June 30,
	2008		2007		2006
		(in thousands)
Share-based compensation related to:
Equity classified stock options	$	3,977	$	3,242	$	3,588
Equity classified restricted stock		323		400		128
Tender offer modication		604		—		—
Total share-based compensation	$	4,904	$	3,642	$	3,716

Stock Options

During the fiscal year ended June 30, 2008, the Company granted 356,165 stock options to certain employees. These options vest annually over 3 years and have a 10-year contractual life. In accordance with the requirements of the Company’s Equity Award Grant Policy, the options issued during the fiscal year were granted with an exercise price that is no less than 100% of the fair market value of those shares on the date of the grant.

The fair value of each option (for purposes of calculation of share-based compensation) was estimated on the date of grant using the Black-Scholes-Merton option pricing formula that uses assumptions determined at the date of grant. Use of this option pricing model requires the input

59

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term (“expected volatility”) and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Consolidated Income Statements.

The Company used the following weighted average assumptions for the options granted during the following fiscal years:

	Fiscal Year Ended June 30,
	2008			2007			2006
Expected term		4.59 years			4.7 years			5 years
Expected volatility		38.00	%		35.90	%		40.00	%
Risk-free interest rate		3.40	%		5.04	%		4.30	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted average fair value per option	$	13.20		$	12.60		$	12.51

The weighted average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends and behaviors of certain groups and individuals receiving these awards. The expected volatility is predominately based on the historical volatility of our common stock for a period approximating the expected life. The risk-free interest rate was based on published U.S. Treasury spot rates in effect at the time of grant with terms approximating the expected life of the option. The dividend yield assumption was based on our dividend payment history and expectations of future dividend payments.

60

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

A summary of our stock option plans is presented below:

	Fiscal Year Ended June 30, 2008
	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding, beginning of year	2,051,306		$	20.52
Granted	356,165			36.62
Exercised	(477,696	)		15.55
Cancelled, forfeited, or expired	(70,222	)		19.73
Outstanding, end of year	1,859,553			25.58	6.49	$	9,416,149
Vested and expected to vest at June 30, 2008	1,792,130			25.27	6.39	$	9,416,149
Exercisable, end of year	1,185,323		$	20.78	5.03	$	9,416,149

The aggregate intrinsic value was calculated using the market price of our stock on June 30, 2008 and the exercise price for only those options that have an exercise price that is less than the market price of our stock. The aggregate intrinsic value of options exercised during the fiscal years ended June 30, 2008, 2007, and 2006 was $9.1 million, $2.9 million, and $8.8 million, respectively.

A summary of the status of the Company’s unvested shares as of June 30, 2008, and changes during the year then ended, is presented below:

	Fiscal Year Ended June 30, 2008
	Options		Weighted- Average Grant Date Fair- Value
Unvested, beginning of year	637,357		$	12.85
Granted	356,165			13.20
Vested	(255,339	)		13.17
Cancelled, forfeited, or expired	(63,953	)		11.28
Unvested, end of year	674,230		$	12.78

As of June 30, 2008, there was approximately $6.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under

61

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

the plans. The cost is expected to be recognized over a weighted-period of 1.9 years. The total fair value of shares vested during the fiscal years ended June 30, 2008, 2007, and 2006 is $3.4 million, $3.9 million, and $3.9 million, respectively.

The following table summarizes information about stock options outstanding as of June 30, 2008:

Range of Exercise Prices	Shares Outstanding	Weighted- Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.00 - $3.67	0	0.00	$	0.00	0	$	0.00
$3.67 - $7.34	10,668	0.27	$	3.95	10,668	$	3.95
$7.34 - $11.01	314,427	2.19	$	9.86	314,427	$	9.86
$11.01 - $14.68	210,166	3.82	$	12.63	210,166	$	12.63
$14.68 - $18.35	62,666	4.41	$	16.85	62,666	$	16.85
$18.35 - $22.01	18,800	5.43	$	21.58	18,800	$	21.58
$22.01 - $25.68	77,858	5.51	$	24.54	77,858	$	24.54
$25.68 - $29.35	93,700	7.53	$	27.53	61,301	$	27.51
$29.35 - $33.02	552,993	8.46	$	31.27	254,502	$	30.81
$33.02 - $36.69	518,275	8.44	$	35.75	174,935	$	33.91
	1,859,553	6.49			1,185,323

The Company issues shares to satisfy the exercise of options.

Review of Stock Option Granting Practices and Related Accounting

On October 9, 2006, the Company announced that its Board of Directors had established a Special Committee of independent directors to conduct a review of the Company’s stock option granting practices and related accounting with the assistance of independent legal counsel and forensic auditors. On January 15, 2007, the Special Committee reported to the Board of Directors regarding its findings, and recommended that the Company’s management determine the impact of the Special Committee’s findings on the Company’s accounting for the option grants and make appropriate adjustments and required disclosures. In that regard, management reached a determination that, under applicable accounting principles, the appropriate measurement dates for certain stock option grants, the dates when all necessary corporate action had been taken with respect to such grants, differed from the dates previously recorded by the Company for financial accounting and tax purposes. As a result of the Special Committee’s findings, the Company restated its historical financial statements to, among other things, record charges for stock-based compensation expense related to certain option grants and to account for the tax-related consequences, resulting in a cumulative after tax adjustment to reduce net income over the period 1995 to 2006 by $5.3 million. On June 18, 2007, the Company filed an Amendment No. 1 to its annual report on Form 10-K/A for the year ended June 30, 2006 to reflect the impact of the restatement on its historical financial statements.

62

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Remediation Plan Related to Review of Stock Option Granting Practices and Related Accounting

In connection with the review of the Company’s stock option granting practices, the Special Committee recommended a remediation plan to the Board of Directors to address the issues raised by its findings. Those recommendations, which were adopted by the Board of Directors, included a series of improvements with respect to the Company’s stock option grant practice. On November 6, 2007, the Board of Directors acknowledged and accepted certain remedial actions with respect to certain current and former executive officers and directors of the Company resulting from the investigation undertaken by the Special Committee. These remedial actions reflected the voluntary offer of appropriate remediation of financial benefits received by such individuals from the option related issues identified by the Special Committee’s investigation.

These remedial actions included, among other things, the elimination of the excess benefit received by these officers and directors from options having been granted to them with exercise prices below the fair market value of the Company’s common stock on the appropriate measurement date. For outstanding options, this was accomplished by amending each option to increase the exercise price to the fair market value on the appropriate measurement date. As a result of these amendments, the exercise prices of options held by these individuals to purchase an aggregate of 580,754 shares were amended, thereby eliminating an aggregate excess benefit to them of approximately $1.1 million. Since the fair value of the amended awards was less than the fair value of the original awards, there was no incremental compensation expense recorded in connection with this modification, in accordance with SFAS 123(R).

For options that had already been exercised, remediation was accomplished by such individuals compensating the Company for the amount of excess benefit received by them upon exercise. The total amount received by the Company from these individuals was $0.8 million, which was recorded as an increase to additional paid-in-capital during the current fiscal year.

Tax Consequences under Internal Revenue Code Section 409A

Also, in connection with the review of the Company’s stock option granting practices, the Company determined that a number of stock options granted to non-executive employees were granted with exercise prices below the quoted market price of the Company’s common stock on the date of the revised grant. Under Section 409A of the Internal Revenue Code (“Section 409A”), options that were granted with exercise prices below the quoted market price of the underlying stock on the date of grant and that vest after December 31, 2004 are subject to unfavorable tax consequences that did not apply at the time of grant. In order to compensate the Company’s non-executive employees who previously exercised affected options and already incurred taxes and penalties, the Company made payments on behalf of such individuals for these taxes in fiscal 2008 for an aggregate amount of approximately $1.6 million.

In order to remedy the unfavorable personal tax consequences of Section 409A for non-executive holders of outstanding options, the Company conducted a tender offer in the quarter

63

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

ended December 31, 2007 for the affected options, pursuant to which the Company offered to amend the affected options to increase the option exercise price to the quoted market price on the revised grant date, and to give option holders (excluding certain executive officers) a cash payment for the difference in option exercise price between the amended option and the original price. The Company accounted for the financial impact of the tender offer as a stock option modification, resulting in an increase to share-based compensation of $0.6 million, a $0.4 million decrease in additional-paid-in-capital, and the establishment of a $1.1 million liability to reflect the partial settlement of these options in accordance with SFAS 123(R). The aggregate cash payments associated with the tender offer were subsequently paid out to the holders of these options in January 2008.

On January 24, 2008, the Company received written notice from the SEC advising it that the SEC’s investigation concerning the Company’s historical stock option grant practices had been completed and that no enforcement action was recommended.

Restricted Stock

In fiscal 2007, the 2003 Directors Plan was amended to provide that non-employee directors will receive annual awards of restricted stock, as opposed to stock options. The number of shares of restricted stock to be granted will be established from time to time by the Board of Directors. Currently, the number of shares of restricted stock awarded to each non-employee director will be determined by dividing $80,000 by the fair market value of the common stock on the date of grant. These awards will generally vest in full on the day that is six months after the date of grant. On December 7, 2007, the Company granted 8,800 restricted shares in accordance with the provisions of this plan. As of June 30, 2008, there were 148,800 shares available for grant under this plan.

(10) Employee Benefit Plans

The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code that covers all employees meeting certain eligibility requirements. For the years ended June 30, 2008, 2007 and 2006 the Company provided a matching contribution of $415,000, $407,000 and $372,000, respectively, which was equal to one-half of each participant’s contribution, up to a maximum matching contribution per participant of $800 for 2008, 2007 and 2006. The Company determines its matching contributions annually and can make discretionary contributions in addition to matching contributions. In fiscal 2008, 2007 and 2006, the Company made discretionary profit-sharing contributions of approximately $6.4 million, $4.6 million and $4.2 million, respectively. Employer contributions are vested based upon tenure over a five-year period.

The Company also maintains a non-qualified, unfunded, deferred compensation plan that allows eligible executives to defer a portion of their compensation in addition to receiving discretionary matching contributions from the Company. Employer contributions are vested over a five-year period.

64

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

(11) Income Taxes

Income tax expense (benefit) consists of:

	Year ended June 30,
	2008			2007		2006
	(In thousands)
Current:
Federal	$	27,087		$	20,213	$	22,495
State		3,663			2,338		2,392
Foreign		4,046			2,531		2,531
Total current		34,796			25,082		27,418
Deferred:
Federal		(348	)		423		(4,649	)
State		(162	)		8		71
Foreign		300			474		(1,248	)
Total deferred		(210	)		905		(5,826	)
Total	$	34,586		$	25,987	$	21,592

A reconciliation of the U.S. Federal income tax expense at a statutory rate of 35% to actual income tax expense, excluding any other taxes related to extraordinary gain, is as follows:

	Year ended June 30.
	2008			2007			2006
	(In thousands)
U.S. Federal income tax at statutory rate	$	31,588		$	24,036		$	21,572
Increase (decrease) in income taxes due to:
State and local income taxes, net of U.S. Federal income tax benefit		2,338			1,525			1,528
Tax credits		(277	)		(108	)		(848	)
Valuation allowance		772			(34	)		(1,457	)
Effect of foreign operations, net		(267	)		(359	)		166
Stock compensation		426			291			620
Other		6			636			11
	$	34,586		$	25,987		$	21,592

65

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2008 and 2007 are presented below:

	2008			2007
	(In thousands)
Deferred tax assets derived from:
Allowance for accounts receivable	$	3,360		$	5,194
Inventories		5,630			5,682
Nondeductible accrued expenses		3,053			1,754
Net operating loss carryforwards		184			176
Tax credits		1,083			171
Deferred compensation		2,311			1,627
Stock compensation		2,532			2,606
Total deferred tax assets		18,153			17,210
Valuation allowance		(819	)		(47	)
Total deferred tax assets	$	17,334		$	17,163
Deferred tax liabilities derived from:
Timing of amortization deduction from intangible assets	$	(1,824	)	$	(1,020	)
Timing of depreciation and other deductions for building and equipment		(18	)		(277	)
Total deferred tax liabilities	$	(1,842	)	$	(1,297	)
Net deferred tax assets	$	15,492		$	15,866

The components of pretax earnings are as follows:

	Year ended June 30,
	2008		2007		2006
	(In thousands)
Domestic	$	75,793	$	58,901	$	53,450
Foreign		14,425		9,772		8,183
	$	90,218	$	68,673	$	61,633

At June 30, 2008, the Company has: (i) gross net operating loss carryforwards of approximately $243,000 for U.S. Federal income tax purposes that begin expiring in 2020; (ii) state income tax credit carryforwards of approximately $406,000 that begin expiring in 2019. At June 30, 2008, a valuation allowance of $47,000 that had previously provided for a portion of the foreign operating loss carryforwards was reversed, as all of these losses were utilized. The valuation allowance decreased by $47,000 and $34,000 during the years ended June 30, 2008

66

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

and June 30, 2007, respectively. During 2008, a full valuation allowance was established against foreign tax credits of approximately $819,000. In accordance with SFAS 109, it was determined that it is more likely than not that the credits cannot be utilized.

The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes and additional U.S. federal income taxes to the extent they are not offset by foreign tax credits, but it is not practicable to estimate the total liability that would be incurred upon such a distribution.

Effective July 1, 2007, the beginning of fiscal year 2008, the Company adopted the provisions of FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The adoption of FIN 48 did not have a material impact on the Company’s financial statements. As of the adoption date, the Company had gross unrecognized tax benefits of $1.6 million, $1.3 million of which, if recognized, would affect the effective tax rate. As of June 30, 2008 the Company had gross unrecognized tax benefits of $2.0 million, $1.7 million of which, if recognized, would affect the effective tax rate, an increase of $0.4 million and $0.4 million, respectively. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(in thousands)
Balance as of July 1, 2007	$	1,599
Additions based on tax positions related to the current year		-
Additions for tax positions of prior years		394
Reduction for tax positions of prior years		(17	)
Settlements		-
Balance at June 30, 2008	$	1,976

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before 2004. U.S. federal income tax returns for fiscal years 2003, 2004, 2005, and 2006 previously under

67

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

examination by the taxing authorities were closed during the fiscal year ended June 30, 2008. All expected adjustments arising from the examinations had been accrued and there were no material adjustments.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of June 30, 2008, the Company had approximately $0.6 million accrued for interest and penalties, of which $0.1 million was a current period expense.

The Company’s effective tax rate differs from the federal statutory rate of 35% primarily as a result of state income taxes.

(12) Commitments and Contingencies

The Company leases office and warehouse space under non-cancelable operating leases that expire through September 2017. Future minimum lease payments under operating leases are as follows:

	Payments
Fiscal year ended June 30:	(In thousands)
2009	$	4,379
2010		4,507
2011		4,141
2012		3,562
2013		3,063
Thereafter		10,841
	$	30,493

Lease expense was approximately $3.8 million, $2.2 million, $1.7 million for the years ended June 30, 2008, 2007, and 2006, respectively. On April 27, 2007, the Company entered into an agreement to lease approximately 600,000 square feet for distribution, warehousing and storage purposes in a building located in Southaven, Mississippi. The lease also provides for a right of first refusal on an additional 147,000 square feet of expansion space. The term of the lease is 120 months with 2 consecutive 5-year extension options.

A majority of the Company’s net revenues in 2008, 2007 and 2006 were received from the sale of products purchased from the Company’s ten largest vendors. The Company has entered into written distribution agreements with substantially all of its major vendors. While the Company’s agreements with most of its vendors contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days notice.

The Company or its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition or results of operations.

68

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

(13) Segment Information

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two reporting segments, based on geographic location. The measure of segment profit is operating income, and the accounting policies of the segments are the same as those described in Note 2.

North American Distribution

North American Distribution offers products for sale in four primary categories: (i) AIDC and POS equipment sold by the ScanSource POS and Barcoding sales unit, (ii) voice, data and converged communications equipment sold by the Catalyst Telecom sales unit, (iii) video conferencing, telephony, and communications products sold by the ScanSource Communications unit, (iv) electronic security products and wireless infrastructure products through the ScanSource Security Distribution sales unit. These products are sold to more than 14,000 resellers and integrators of technology products that are geographically disbursed over the United States and Canada in a pattern that mirrors population concentration. No single account represented more than 6% of the Company’s consolidated net sales for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

International Distribution

The international distribution segment sells to two geographic areas, Latin America (including Mexico) and Europe, and offers AIDC and POS equipment as well as communications products to more than 6,000 resellers and integrators of technology products. This segment began during fiscal 2002 with the Company’s purchase of a majority interest in Netpoint and the start-up of the Company’s European operations. In April 2008, the Company expanded its communications business internationally with the acquisition of MTV Telecom, a UK-based distributor of voice and data solutions. Of this segment’s customers, no single account represented more than 1% of the Company’s consolidated net sales during the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

Inter-segment sales consist of sales by the North American distribution segment to the international distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying consolidated financial statements.

69

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Selected financial information for each business segment is presented below:

	Year ended June 30,
	2008			2007			2006
	(In thousands)
Sales:
North American distribution	$	1,806,700		$	1,697,832		$	1,461,048
International distribution		397,951			317,279			223,809
Less intersegment sales		(29,166	)		(28,184	)		(19,257	)
	$	2,175,485		$	1,986,927		$	1,665,600
Depreciation and amortization:
North American distribution	$	6,214		$	6,243		$	5,186
International distribution		913			687			580
	$	7,127		$	6,930		$	5,766
Operating income:
North American distribution	$	76,233	(1)	$	61,972	(1)	$	53,776
International distribution		17,732			13,361			9,534
	$	93,965		$	75,333		$	63,310
Assets:
North American distribution	$	671,434		$	636,553		$	508,591
International distribution		100,772			101,895			108,906
	$	772,206		$	738,448		$	617,497
Capital expenditures:
North American distribution	$	5,751		$	3,929		$	8,441
International distribution		1,231			613			990
	$	6,982		$	4,542		$	9,431

⁽¹⁾ Included in North American distribution's operating income for the fiscal years ended June 30, 2008 and 2007 are $1.0 million and $9.9 million, respectively, of direct costs associated with the special committee review of the Company's stock option practices. See Note 1A to the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company's amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.

(14) Related Party Transactions

During fiscal years 2008, 2007, and 2006, the Company had sales of $4.2 million, $5.6 million, and $5.1 million, respectively, to companies affiliated with the former minority shareholder of Netpoint. At June 30, 2008, 2007 and 2006, accounts receivable from these companies totaled $0.1 million, $0.7 million, and $1.1 million, respectively.

Also, during fiscal years 2008 and 2007, the Company had sales of $7.2 million and $6.8 million to a company affiliated with a member of management. At June 30, 2008 and 2007, net accounts receivable from this company totaled $0.5 million and $1.2 million, respectively. The Company also made purchases of $0.2 million and $1.2 million from this company in fiscal years 2008 and 2007, respectively.

70

MARKET FOR THE REGISTRANT’S COMMON STOCK

AND RELATED SHAREHOLDER MATTERS

The Company’s common stock is quoted on The NASDAQ Global Select Market under the symbol “SCSC.” The Company has never paid or declared a cash dividend since inception and the Board of Directors does not intend to institute a cash dividend policy in the foreseeable future. Under the terms of the Company’s revolving credit facility, the payment of cash dividends is restricted. Effective June 5, 2006, the Board of Directors of the Company approved a two-for-one stock split of the common stock effected in the form of a 100% common stock dividend. The effect of the stock split has been recognized retroactively in all share and per share data. On August 13, 2008, there were approximately 13,627 recorded and known beneficial holders of the Company’s common stock. The following table sets forth, for the periods indicated, the high and low sales prices of the Company’s common stock on the NASDAQ Global Select Market.

	High		Low
Fiscal Year 2008
First quarter	$	34.14	$	25.44
Second quarter		39.50		28.06
Third quarter		38.21		22.61
Fourth quarter		37.50		23.75
Fiscal Year 2007
First quarter	$	32.25	$	27.59
Second quarter		32.39		28.18
Third quarter		30.78		25.22
Fourth quarter		33.98		26.41

71

STOCK PRICE PERFORMANCE GRAPH

The following stock performance graph compares cumulative total shareholder return on the Company’s common stock over a five year period with the Nasdaq Market Index and with the Standard Industrial Classification (“SIC”) Code Index (SIC Code 5045-Wholesale-Computers and Peripheral Equipment and Software) for the same period. Total shareholder return represents stock price changes and assumes the reinvestment of dividends. The graph assumes the investment of $100 on July 1, 2003.

ASSUMES $100 INVESTED ON JULY 1, 2003

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING JUNE 30, 2008

	FISCAL YEAR ENDING
COMPANY/INDEX/MARKET	6/30/2003	6/30/2004	6/30/2005	6/30/2006	6/29/2007	6/30/2008
ScanSource, Inc.	100.00	222.13	160.52	219.22	239.18	200.07
SIC Code Index (Wholesale-Computers & Peripheral Equipment)	100.00	144.62	128.63	137.54	157.81	126.36
NASDAQ Market Index	100.00	127.18	127.04	135.21	162.10	142.32

72

BOARD OF DIRECTORS

James G. Foody Chairman (non-executive)

Michael L. Baur Chief Executive Officer, ScanSource Inc.

Steven R. Fischer Former President, North Fork Business Capital Corporation

Michael J. Grainger Former President and Chief Operating Officer, Ingram Micro, Inc.

John P. Reilly Managing Partner, Keltic Financial Services LLC

OFFICERS

Michael L. Baur Chief Executive Officer

R. Scott Benbenek President of Worldwide Operations

Richard P. Cleys Vice President and Chief Financial Officer

Andrea D. Meade Executive Vice President of Operations and Corporate Development

John J. Ellsworth General Counsel and Corporate Secretary

John K. Black President - Catalyst Telecom

Elias Botbol President - ScanSource Latin America

Xavier Cartiaux Managing Director - ScanSource Europe

Jill R. Phillips President - ScanSource Communications

Martin Hatcher Executive Chairman, MTV Telecom - ScanSource Communications

Natalie Foers Managing Director, MTV Telecom - ScanSource Communications

Jeffrey E. Yelton President - ScanSource POS & Barcoding, North America

Paul J. Constantine Vice President - Solutions and Services

Linda B. Davis Vice President and Treasurer

Gregory B. Dixon Vice President and Chief Technology Officer

P. Christopher Elrod Vice President - Information Systems

Gerald Lyons Vice President and Corporate Controller

Marsha M. Madore Vice President - Human Resources

Shelby L. McCloud Vice President - Warehouse Operations

Robert S. Mclain, Jr. Vice President - Marketing

Timothy M. Ramsey Vice President - Reseller Financial Services

Clayton D. Sorensen Vice President - Strategic Development

STOCK LISTING The Company’s stock is traded on the NASDAQ Global Select Market under the symbol SCSC.

SECURITIES COUNSEL

Alston & Bird LLP

Charlotte, North Carolina

TRANSFER AGENT

American Stock Transfer and Trust Company

New York, New York

INDEPENDENT ACCOUNTANTS

Ernst & Young LLP

Greenville, South Carolina

SHAREHOLDER INQUIRIES

ScanSource, Inc., welcomes inquiries from its shareholders and other interested investors. For further information or a copy of SEC form 10k, contact our Investor Relations Department at 800.944.2432, ext. 4375, or by e-mail at investor@scansource.com.

ANNUAL MEETING

The annual meeting of shareholders of the Company will be held at 10:00 a.m. on December 4, 2008, at the Marriott Hotel, 1 Parkway East, Greenville, South Carolina.

CORPORATE HEADQUARTERS

Greenville, South Carolina | 864.288.2432

LOCATIONS

Tempe, Arizona Miami, Florida

Norcross, Georgia Lenexa, Kansas

Eagan, Minnesota Buffalo, New York

Southaven, Mississippi Bellingham, Washington

Richmond, BC, Canada Toronto, ON, Canada

Mexico City, Mexico Brussels, Belgium

Liege, Belgium Olivet, France

Bad Homburg, Germany Eindhoven, Netherlands

Crawley, United Kingdom Hull, United Kingdom

Egham, United Kingdom

ScanSourceR

INC.

6 LOGUE COURT | GREENVILLE, SOUTH CAROLINA 29615 | 800.944.2432 | WWW.SCANSOURCEINC.COM

EX-21.1

Exhibit 21.1

ScanSource, Inc.

Schedule of Subsidiaries

Name of Subsidiary	State/Country of Incorporation	Percentage of Voting Securities Owned by Immediate Parent
4100 Quest, LLC	South Carolina	100%
ScanSource Properties, LLC	South Carolina	100%
Logue Court Properties, LLC	South Carolina	100%
8650 Commerce Drive, LLC	Mississippi	100%
Partner Services, Inc. f/k/a ChannelMax, Inc.	South Carolina	100%
ScanSource Security Distribution, Inc.	South Carolina	100%
ScanSource Communications, Inc.	South Carolina	100%
ScanSource Canada, Inc.	British Columbia	100%
ScanSource de Mexico S de RL de CV	Mexico	100%
Outsourcing Unlimited, Inc.	Georgia	100%
Netpoint International, Inc.	Florida	100%
ScanSource France SARL	France	100%
ScanSource Europe Limited	United Kingdom	100%
ScanSource UK Limited	United Kingdom	100%
ScanSource EDC Limited	United Kingdom	100%
ScanSource Europe SPRL	Belgium	100%
ScanSource Germany GmbH	Germany	100%
ScanSource Europe (Italia) Sede Secondaria	Italy	100%
ScanSource Netherlands	Netherlands	100%
MTV Telecom (Distribution) PLC	United Kingdom	100%

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of ScanSource, Inc. of our reports dated August 27, 2008, with respect to the consolidated financial statements of ScanSource, Inc., and the effectiveness of internal control over financial reporting of ScanSource, Inc., included in the 2008 Annual Report to Shareholders of ScanSource, Inc.

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-8 No. 333-94640) of ScanSource, Inc. dated July 17, 1995;

(2) Registration Statement (Form S-8 No. 333-08884) of ScanSource, Inc. dated April 10, 1998;

(3) Registration Statement (Form S-8 No. 333-49879) of ScanSource, Inc. dated April 10, 1998;

(4) Registration Statement (Form S-8 No. 333-78281) of ScanSource, Inc. dated May 12, 1999;

(5) Registration Statement (Form S-8 No. 333-36766) of ScanSource, Inc. dated May 11, 2000;

(6) Registration Statement (Form S-8 No. 333-110220) of ScanSource, Inc. dated November 4, 2003;

(7) Registration Statement (Form S-8 No. 333-115534) of ScanSource, Inc. dated May 14, 2004;

(8) Registration Statement (Form S-8 No. 333-144121) of ScanSource, Inc. dated June 28, 2007

of our reports dated August 27, 2008, with respect to the consolidated financial statements of ScanSource, Inc., and the effectiveness of internal control over financial reporting of ScanSource, Inc., incorporated herein by reference, and our report dated August 27, 2008 with respect to the financial statement schedule of ScanSource, Inc. included in this Annual Report (Form 10-K) of ScanSource, Inc. for the year ended June 30, 2008.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 27, 2008

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Michael L. Baur, Chief Executive Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of ScanSource, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael L. Baur

Michael L. Baur, Chief Executive Officer

(Principal Executive Officer)

August 28, 2008

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Richard P. Cleys, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of ScanSource, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Richard P. Cleys

Richard P. Cleys, Vice President and Chief Financial Officer

(Principal Financial Officer)

August 28, 2008

EX-32.1

Exhibit 32.1

Certification of the Chief Executive Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of ScanSource, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 28, 2008	/s/ Michael L. Baur
	Michael L. Baur, Chief Executive Officer (Principal Executive Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification of the Chief Financial Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of ScanSource, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 28, 2008	/s/ Richard P. Cleys
	Richard P. Cleys, Vice President and Chief Financial Officer (Principal Financial Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.